Bargain Hunters Are Bad News For Tesco plc, J Sainsbury plc and WM Morrison plc

tesco2Everybody loves a bargain, don’t they? Try telling that to Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US), J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) and WM. Morrison Supermarkets (LSE: MRW). Right now, bargain hunters are the bane of their lives.

Supermarkets have seen sales volumes fall for the first time since the Second World War, according to analysts at IRI, with a 3.2% drop in the first half of this year.

It blames attempts by shoppers to save money by switching to cheaper brands, which is having an “unprecedented effect” on the big supermarkets.

Bargain Bin

This suggests the supermarket price war simply isn’t enough to satisfy shoppers, who are still rummaging around to save every penny they can.

The switch to cheaper brands cost the industry £800m last year, and it’ll probably be even more in 2014.

Sainsbury'sShoppers are also hurting supermarkets by making a bee-line for discounters Aldi and Lidl, or simply doing with less.

The new research backs figures from the latest British Retail Consortium survey, which showed that underlying food sales fell by 3.5% in the three months to 31 July, the steepest three-month decline since it began keeping records in December 2008.

Cash-strapped customers

You don’t have to look very far to see the root cause of the problem. In the three months to 30 June, average pay, excluding bonuses, rose just 0.6% year-on-year, the lowest on record. That compares to CPI inflation of 1.9%.

Welfare benefit cuts may also have hit food spending.

Bitter Taste

Rightly or wrongly, hard-up shoppers transferring their frustrations to the big supermarkets. Check out any online forum and you will see angry complaints about high prices, surly staff, poor quality produce and mind-boggling BOGOF promotions.

morrisonsThe big supermarkets also draw random political attacks, for underpaying staff, squeezing suppliers, destroying the high street, and plenty more.

This is part of a wider post-financial crisis disillusionment with the establishment, which now embraces everything from expense-fiddling MPs, bonus-bagging bankers, overpaid Premier League footballers to Tesco.

Disenchanted shoppers are voting with their wallets.

Share Slump

Tesco’s share price is in freefall, down 35% to 245p in the last year. WM Morrison has dropped a whopping 41% to 170p. Sainsbury’s, easily the best performer of the three, is nevertheless down 22% to 307p.

Tesco and Morrisons continue to lose market share. Tesco’s is down from 29.7% to 28.3% in the last three months, according to latest Kantar Worldpanel data, whilst Morrisons’ fell from 11.4% to 10.9%.

Sainsbury’s, remarkably, held onto its share, holding the line at 16.4%.

Cut Price Deals

With Tesco and Morrisons currently yielding 6.02% and 7.62% respectively, bargain hunting investors will undoubtedly be tempted. The danger is that these dividends are unsustainable and will have to be cut, possibly to fund the next round in the price war.

Trading at 7.6 times earnings and 6.8 times earnings respectively, Tesco and Morrisons are certainly priced to go. But of the three, I prefer premium brand Sainsbury’s.

Unlike its two rivals, Sainsbury’s has clung onto its customers and credibility, and largely evaded the suicidal price war. Yet it is also cheap, at 9.2 times earnings, and its 5.61% yield is generous. 

That dividend may also come under pressure, because this is a tough sector right now. But Sainsbury’s remains a quality stock, available at a bargain price.

There are Safer Ways To Bag A Top Dividend than our beleaguered supermarkets.

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Harvey Jones has no position in any shares mentioned. The Motley Fool owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.