Are Tesco PLC, J Sainsbury plc And Wm. Morrison Supermarkets plc Eating Themselves To Death?

The knives are out for once mighty supermarket chains Tesco (LSE: TSCO), J Sainsbury (LSE: SBRY) and Morrisons (LSE: MRW).

You already know about falling sales, disillusioned customers, dwindling market share, Aldi and Lidl, Tesco’s £263m black hole, and the general sense of sectoral decline.

These have taken huge chunks out of the supermarkets’ share prices over the last year, with Tesco down 53%, Sainsbury’s down 37% and Morrisons off 42%.

The latest wound is a huge increase in business rates from next April, as revised valuations could hike rates by up to 40%, further squeezing the business model of their out-of-town superstores.

That’s not all. As if the big supermarkets didn’t have enough on their plate, they now stand accused of “cannibalising” their own sales.

The Inconvenient Truth

Convenience stores, once seen as a saviour, are largely to blame, according to a supermarket expansion report from CBRE and Retail Locations. While convenience store sales have grown strongly, this has come at the expense of the supermarkets’ larger stores.

CBRE says the spread of convenience store openings has encouraged repetitive top-up shopping that cannibalises main grocery sales and weekly one-stop shops at superstores, changing consumer behaviour.

Autumn Cannibalism

Aldi and Lidl’s aggressive expansion activity is also partly to blame, naturally. Their store numbers have jumped more than 300% since 1998, with their market share leaping from 2.1% to 8.3%, according to Kantar Worldpanel. 

But CBRE says this doesn’t explain the sudden drop in the big supermarkets’ share of main grocery sales since 2011. Convenience stores and growing online sales, have proved “heavily margin diluting”.

One problem is that it takes up to 15 convenience stores to generate the sales of one major supermarket, and they only sell a limited range of products, which limits sales.

It also erodes the concept of customer loyalty. The clue is in the name: shoppers simply go to the most convenient.

Eaten Alive

With Sainsbury’s, M&S Simply Food, Waitrose, Tesco, Morrisons, Asda, Aldi and Lidl all expanding their small format stores, the pressure will only grow. What some saw as a saviour for the supermarket model, could be quite the reverse.

The big supermarkets won’t go down without a fight. Morrisons has just posted a 6.3% drop in like-for-like sales in the third quarter, although markets were happy that the pace of decline had slowed.

But survival will be even harder if they continue to take a big bite out of their own growth prospects.

Anybody investing in the big supermarkets right now is taking a chance, especially when there are much brighter opportunities to be had.

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Harvey does not own shares in any company mentioned. The Motley Fool owns shares in Tesco.