Inflation is currently sitting at 7%, and is expected to continue rising for the coming months. As a result, retail spending has seen a drop, as the cost of living crisis continues to hit consumers hard. The effects of this are already heavily impacting the largest supermarket in the UK, Tesco (LSE: TSCO). So, with all that in mind, the Tesco share price could dip further and present long-term shareholders like myself with a buying opportunity.
Slip and slide
The latest ONS inflation survey reported that 83% of respondents saw an increase in their cost of living. To make matters worse, almost a third of adults are finding it harder to pay their usual household bills. The consequence of this was evident in the latest retail sales numbers, which saw a 1.4% decline month on month (M/M). The ONS stated, “Food store sales volumes fell by 1.1% (M/M) and have fallen each month since November 2021”.
Where does Tesco stand in all of this, you may ask. Well, grocery retailers in the UK were already in a hot battle for customers. Grocery stores operate on high volume and low margins, so securing market share is a BIG deal. While Tesco continues to dominate more than a quarter of the supermarket industry, it has seen its market share slip from 31% to 27.3% today.
A Lidl worry
Kantar’s most recent grocery report showed that grocery price inflation reached an 11-year high of 5.9%. Overall supermarket sales fell by the same amount as a consequence. In fact, in the 12 weeks to 17 April, Tesco has seen a 4.8% decline in sales. Meanwhile, its budget competitors, Aldi and Lidl, together managed to increase sales by 8.2% in the same period. Tesco’s decline, though, put it in the best position among its high street peers. This is in large due to its market dominance and its latest Aldi price-match strategy.
| Retailer | Sales 12 Weeks to 18/4/2021 (£m) | Market Share (2021) | Sales 12 Weeks to 17/4/2022 (£m) | Market Share (2022) | Change in Sales (Y/Y) |
|---|---|---|---|---|---|
| Tesco | 8,523 | 27.0% | 8,114 | 27.3% | -4.8% |
| Sainsbury’s | 4,834 | 15.3% | 4,459 | 15.0% | -7.7% |
| Aldi | 2,521 | 8.0% | 2,628 | 8.8% | 4.2% |
| Lidl | 1,901 | 6.0% | 1,976 | 6.6% | 4.0% |
Mixed bag of goods
The grocery retailer is already operating on a minuscule profit margin of 2.5%. The recent wage increases for its workers and lower prices to match Aldi’s aren’t going to help its bottom line. Recent guidance given by Sainsbury’s painted a gloomy picture too, citing, “Significant external pressures and uncertainties, including higher operating cost inflation”.
Nevertheless, there’s a silver lining among the gloomy clouds. Although Tesco expects its margins to take a hit, it still maintains the highest margins in the industry. Its excellent relationship with suppliers should help it keep prices low and maintain profitability. Moreover, its Clubcard scheme encourages customer volume through discounted offers.
The Tesco share price is also trading at a price-to-earnings (P/E) ratio of 14, making it the cheapest British grocery stock. Additionally, its track record of maintaining market dominance makes this a valuable blue-chip stock that pays a decent 4% dividend.
With its share price expected to continue dipping from lower sales, it could be seen as a buying opportunity. However, due to its slim profit margins in an already saturated market, I don’t see shares in the grocery giant bringing me a meaningful return over the long term. As such, I won’t be investing in Tesco shares.
