Head To Head: J Sainsbury plc vs Tesco PLC

sainsbury'sIn the 1980s, Sainsbury’s (LSE: SBRY) was the leading supermarket in the UK, providing a shopping experience that was way ahead of all its competitors. It had cracked the (what appears obvious now) concept of providing good food that was affordably priced. But gradually it seemed to lose its way, and from around 2000 onwards it was overtaken by a refreshed and resurgent Tesco (LSE: TSCO).

Tesco just seemed more ambitious and more driven: it was growing retail space faster than anyone else. Plus it was expanding into internet shopping, town centre stores, clothing, electronics and homeware. As it expanded, its purchasing power grew, meaning it could offer the cheapest prices. And this made the supermarket even more popular.

Each supermarket has its strengths

If Sainsbury’s was all about fresh, delicious food provided at a reasonable price, Tesco was about compounding a winning formula across every region of the country and every channel.

tescoBy the time chief executive Sir Terry Leahy left, Tesco was, by some distance, Britain’s top supermarket retailer. But even the tallest tree eventually stops growing. Tesco seems to have reached the limits of its growth in the UK.

Even if you are a market leader, it is difficult to maintain this dominance indefinitely. The other supermarkets are now matching Tesco’s prices, and are also expanding into areas such as internet shopping and clothing.

Plus I also see a growing trend of a boom in the premium end of the supermarket business. A Waitrose has recently opened near where we live, and it is amazing how quickly shoppers have flocked to this store.

These days, shopping is about more than price

In the years since the credit crunch, people have been keen to save money on their weekly shopping. So the value retailers, such as Tesco, Asda, Morrisons, Aldi and Lidl, have been minting it.

But, as economic recovery turns to boom, people are beginning to spend once again. I think there is a great untapped market out there for a premium shopping experience. So I expect the premium retailers — Waitrose, Marks & Spencer and Sainsbury’s — to make gains.

Shopping used to be about buying as many essentials as you could as cheaply as you could. It is still partly about that, but it is increasingly about one word: fun. In this incredibly competitive pick-and-choose world that we live in, any retailers that can provide a shopping experience which is enjoyable, fun, even exciting, will win.

People will say that, with a looming price war, Tesco will always have more in its armoury. But I’m just wondering whether, these days, shopping is about more than that.

Of the FTSE 100 supermarkets (Tesco, Morrisons and Sainsbury’s) on a P/E ratio basis, Sainsbury’s is the cheapest, with a P/E ratio of 10. Tesco currently has quadruple the market capitalisation of Sainsbury’s. I expect Sainsbury’s to make up some of that gap.

Both shares are worth investing in but, currently, my pick is Sainsbury’s.

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