Why I’m Sweeping Tesco PLC And The Other Supermarkets From My Portfolio

Out You Go, Tesco

Last week, I did some spring cleaning. While dusting down my portfolio, I noticed a nasty niff. It turned out to be coming from Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US). On closer examination, I realised that Tesco had reached its sell-by date some time ago, and there was only one thing to do. So I swept the supermarket giant out of my portfolio.

Shortly after, I found J Sainsbury gathering dust on my watchlist. So out came the sweeper again. Thankfully, I’d slung out WM. Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US) years ago. My housework was nicely timed. Tesco has been sliding ever since I sold one week ago at 326p, and is down another 5% today, following disastrous results from Morrisons, which added to the stink over the supermarket sector. Today, you can buy Tesco for 300p. I’ll be shopping elsewhere.

Fall Of The Tesco Empire

I’ve been feeling uneasy about Tesco for months. The once mighty supermarket seems to be going the way of all great empires. Management underestimated the scale of the challenge it faced in trying to conquer the US, where it is Fresh & Easy chain succumbed to imperial overreach. But who foresaw that friendlier territories, like Korea and Thailand, would also turn against it?

Troubles abroad have been overshadowed by home front worries. When consumers were feeling flush, Tesco look cheap. When wages slipped behind prices, it suddenly looked expensive. Foreign upstarts Aldi and Lidl swept in and swept up. Posh shoppers preferred Waitrose. Worse, the relative success of chief executive Justin King at Sainsbury’s made this seem like Tesco had a personal problem, as well as a sectoral one.

Tragic Tesco

I have been impressed by elements of Tesco’s fightback plan. All hail the Hudl, the 7″ budget tablet that should have been rubbish but wasn’t. Overhauling its tired stores and jazzing them up with Giraffes was an original move. Click & Collect is popular, and Tesco is gaining ground online and in convenience stores. Management has correctly identified many of its problems, but I’m not sure they can be reversed.

I ultimately sold because of a sense that the wheel of fortune had spun, and Tesco was doomed to decline, however much it howled against its fate: like King Lear, with ClubCard vouchers. Days after, latest figures from Kantar showed Tesco market share hitting a 10-year low of 27.6%. That is down from 31.7% in 2007. I wish I could always time the market so well.

I fear the sector is in a long-term decline. Tesco’s share price is down 4% over five years, against a 71% rise for the FTSE 100. Morrisons is down 7% and even super Sainsbury’s has returned just 8%. News that Morrisons is entering a price war with Aldi and Lidl adds to my unease. This is a war investors can’t win. Sainsbury’s has a proud record of delivering 36 consecutive quarters of growth, but I fear number 37 will be a stretch too far. That is why I have swept the entire sector out of my portfolio.

There is one thing I will miss about Tesco, its juicy 4.5% yield. Happily, there more fat yields to be had from the FTSE 100. You can find out the best by downloading our brand new report How to Create Dividends For Life. It's completely free, so click here now.


Harvey doesn't own shares in any company mentioned in this article. The Motley Fool owns shares in Tesco and has recommended shares in Morrisons.