What comes next for the Tesco share price?

The rising cost of living continues to cut consumer spending, especially in food spending. So, how will this affect the Tesco share price?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Female florist with Down's syndrome working in small business

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Key Points

  • Inflation is spiralling out of control, and overall grocery sales are down.
  • Aldi and Lidl continue to outperform Tesco, but the blue-chip company still has plenty of tools to fight with.
  • Currently trading at a P/E of 14, the share price could be seen as a buying opportunity.

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.

RetailerSales 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)
Tesco8,52327.0%8,11427.3%-4.8%
Sainsbury’s4,83415.3%4,45915.0%-7.7%
Aldi2,5218.0%2,6288.8%4.2%
Lidl1,9016.0%1,9766.6%4.0%
Source: Kantar Grocery Report

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has recommended Ocado Group, Sainsbury (J), and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »