Tesco PLC And Wm. Morrison Supermarkets plc: Is It Time To Sell The Supermarkets?

Retail, whether you are talking about groceries, electricals, clothing or anything else, is a fickle business.

You may have a company that has successfully traded for decades which suddenly finds itself outmoded and bankrupt — think of Woolworths. You have companies that are overtaken by technological advances — think of HMV. And you have companies that emerge as winners from the brink of bankruptcy — for example, Dixons.

An increasingly fragmented  market

The supermarket business is no different. Sainsbury’s used to be Britain’s most successful supermarket, making very good profits. But in the past decade it was overtaken by a resurgent Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US), which has opened more and more stores, and has steadily expanded the range of products it offers.

There is constant change. And today is no different. The domination of the established giants of Tesco, Sainsbury, Asda and Morrisons (LSE: MRW) (NASDAQOTH: MRWSY.US) is now being eroded by a boom in luxury retailers such as Marks & Spencer and Waitrose, and low-cost stores such as Aldi and Lidl.

The increasing variety of retail outlets ranges from hypermarkets to town centre mini-marts, click-and-collect and online distribution centres. And appearing over the horizon are internet retailers such as eBay and Amazon, which are already building alliances and expanding into the supermarkets’ territory.

Defensive but low-growth companies

The big picture is of a playing field that has expanded, but which has more competitors, each one of which is fiercely protecting its turf. The supermarkets are now engaged in a price war that is as competitive as I have ever seen.

The main winner from this all is the consumer, who has more choice of products to buy, at more reasonable prices, than ever. But I feel that the days of rapid supermarket growth and ballooning profits are now past.

The fact that Tesco is not even expanding abroad, and that all the big supermarkets are now losing market share in the UK, has added to my misgivings.

On a positive note, the supermarkets are cheap and high-yielding, and are likely to produce solid earnings over the next few years — think of them as defensive dividend stocks.

I admit over the past year I have been unsure about whether the supermarkets are a buy — my view now is nuanced. These are steady, reliable shares, but will they break out of their trading ranges any time soon? The lack of future growth is a concern, and the main reason why I have sold my shares in both Tesco and Morrisons.

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> Prabhat owns shares in none of the companies mentioned. The Motley Fool owns shares in Tesco and has recommended shares in Morrisons.