You know the feeling, it’s one of those rare nice, warm, sunny days in London. The perfect day for a picnic. You want to organise something nice for your friends. It sounds easy but it can be tricky. You look around the supermarket for all of your needs: cold meat, bread, wine, fruit, sweets, etc. By the time you’re through making sure you have everything, you realise it ain’t no picnic! Well, Marks & Spencer feels your pain. During the summer, it set up a picnic display. It had everything…
You know the feeling, it’s one of those rare nice, warm, sunny days in London. The perfect day for a picnic. You want to organise something nice for your friends. It sounds easy but it can be tricky. You look around the supermarket for all of your needs: cold meat, bread, wine, fruit, sweets, etc. By the time you’re through making sure you have everything, you realise it ain’t no picnic! Well, Marks & Spencer feels your pain. During the summer, it set up a picnic display. It had everything you could want. There was even an attractive deal if you bought five items or more.
You see, this is what being a supermarket is all about. Admittedly, the picnic idea is a very small example of a wider ‘style’ (for want of a better word) for M&S, and it works well for its target market, but other stores can choose their own special offers for customers. Each company within the market needs to differentiate itself and compete on that basis.
They’re all fighting for a comfy spot
You see the major stores operate within an oligopolistic market structure, so there’s more than enough room for a few large companies, so long as each company can manage its own costs while innovating (meeting customer needs) at the same time.
For my mind that’s the key — innovation. M&S and Waitrose have this wrapped up. They both offer unique, premium products for the top end of the market, and are big on customer engagement (making you feel loved in the store).
Sainsbury’s left out in the cold?
As far as price competition is concerned, Aldi, Asda and Lidl are laughing. Indeed, as incomes have struggled to keep up with inflation for the first time in decades, supermarkets like Aldi and Asda — despite huge “barriers to entry” into the market — have made a real, lasting dent.
So the big question is: can both Tesco and Sainsbury’s survive in their own current price bracket? I’m not sure they can.
Tesco has chosen to divide and conquer. Like Morrisons, it’s appealing to different consumers. Dave Lewis has moved in like Superman. He’ll break up Tesco and ensure it can compete on all levels. This is the only feasible option it has left. It’s already proven it can’t compete on price.
That begs the question, what’s Sainsbury’s going to do? The short answer is, I don’t know. I don’t believe the overall grocery market is big enough for two large mid-tier players.
The numbers speak for themselves: Sainsbury’s earnings per share is set to fall from 32p to 28p. From a price perspective it looks inexpensive (P/E of 9.6), but that’s assuming a large turnaround is on the way. Its dividend yield could also be under threat.
Then there’s Tesco: Like Sainsbury’s, its EPS is looking a little weary. It’s currently at 32 but is expected to drop to 20 in the medium term. Its P/E is 10 (so higher than Sainsbury’s), and its dividend yield is expected to fall.
There you have it. Both stocks look tired and a little beaten-down.
My little thesis
Supermarkets aren’t super-fast growth machines. They sell products we all need and have traditionally been labelled ‘safe’ or ‘defensive’ stocks. They’re meant to move like lazy horses. They should get you to your investment destination without too much fuss. I can see the entire British grocery market being occupied by M&S and Waitrose (and possibly even Morrisons) at the top, Tesco in the middle (while also taking a slice out of the top and bottom), and Aldi, Asda and Lidl at the budget end. Sainbury’s, I believe, will have to find another track to take. I certainly can’t see a clear, steady plan for growth.
The bottom line is that Sainsbury’s, in my view, has too many problems of its own to be effectively looking after you and your money.
This share picking business can be tough. I mean, with supermarkets you've only got a few stocks to choose from, but as we've seen with some of these companies, it can be a nail-biting ride. Do you hang on? Do you get out? If it's stressful with these 'safer' stocks, what about the rest of the market?
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David Taylor has no position in any shares mentioned. The Motley Fool UK 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.