Falling Prices Spell More Bad News For Tesco PLC, J Sainsbury plc And Wm. Morrison Supermarkets plc

The big four UK supermarkets have had a dismal five years, with falling sales, margins and market share. Justin King, inspirational chief executive at J Sainsbury (LSE: SBRY), has just stepped down after 10 highly praised years, but the truth is he gave investors little to cheer. 

During the last decade, the Sainsbury’s share price rose a measly 5p from 309p to 314p, an increase of just 1.6%. Everything is relative, I suppose. Morrisons‘ (LSE: MRW) share price fell nearly 10% over the same period. That’s how bad things are for investors in the big supermarkets.

And they’re not getting any better. Investors in Tesco (LSE: TSCO) have lost a further 20% in the last year alone. This week the British Retail Consortium reported that shop prices are now falling at their fastest rate since 2006, down 1.8% over the last year. That makes now a great time to go shopping (unless you’re buying shares in British retailers).

Cheap As Chips

To be fair, the cost of furniture, electricals and clothes fell faster than groceries. Food prices actually rose 0.6%, but this is a record low for food price inflation. The slowdown has been confirmed by government figures which show that CPI inflation fell to a four-and-a-half year low of 1.5% in May, largely driven by the sharpest fall in food and non-alcoholic beverage prices in a decade.

With the big supermarkets embarking on a price war, led by Tesco and Morrisons, food prices could slow even further, squeezing margins, profits and shareholder returns. That would be acceptable if I could see any winner in this war, but I suspect it will prove a strategic failure. The victors are likely to be those wily German discounters Aldi and Lidl. They can’t be beaten on price, so why are Tesco and Morrisons (reluctantly) marching into their territory? Lidl, by the way, has just unveiled plans to open another 20 stores across the UK, as part of a £220 million expansion plan.

Casualties Of War

Of the big four, Asda looks the most likely beneficiary. It is already seen as downmarket, so has little to lose in terms of image and reputation. Unfortunately, as a wholly owned subsidiary of Walmart (whose deep pockets give it the funding you need to win a war), you can’t invest directly in its stock. 

I have little hope for Morrisons. Yes, it has finally unleashed its online operation, but the big winner from that is likely to be Ocado, which runs the site on its behalf. Tesco is facing war on all (global) fronts, although at least embattled chief executive Philip Clarke now has some support in his bunker following the recruitment of new finance director Alan Stewart, battle-hardened from his time at Marks & Spencer.

Sainsbury’s is the most intriguing case. At 314p, it is nearly 27% down on its 52-week high. But it is sticking to its upmarket guns, with new chief executive Mike Coupe confirming that it will retain its focus on fresh produce and premium food. It has also entered the budget store market, combining its forces with Dansk Supermarket to bring Netto back to the UK, with a target of opening 15 stores by the end of next year. Semi-upmarket and semi-downmarket: it is an intriguing combination.

Sliding prices and cash-strapped customers spell more pain for Tesco, Morrisons and Sainsbury’s. Food fights can get messy, and there’s always a big clean-up bill afterwards. I’m happy to sit this one out.

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Harvey Jones doesn't own shares in any company mentioned in this article

Harvey Jones has no position in any stocks mentioned. The Motley Fool owns shares of Tesco.