Why You Should — And Shouldn’t — Buy J Sainsbury plc

Today I am looking at whether grocery giant Sainsbury’s (LSE: SBRY) is a worthy investment candidate for savvy stock pickers.

Discounters dole out the pain

Of course, the relentless progress of the discounters remains a massive thorn in the side of Sainsbury’s and the rest of the ‘Big 4’ supermarkets. Sainsbury’s entered the budget arena itself by relaunching the Netto brand in Britain recent months, but the success of these outlets is too early to call at this stage.

In the meantime these firms continue to make stunning progress, a point highlighted yet again by latest Kantar Worldpanel data this month. sales at Aldi and Lidl climbed 22.6% and 15.1% correspondingly during the 12 weeks to January 4, pushing their combined market share to 8.3% versus 7.1% last year. Meanwhile Sainsbury’s saw revenues slip 0.7% during the period, eroding its own share to 16.9% from 17.1%.

Kantar noted that more than half of British households paid either Aldi or Lidl retailers one visit during the Christmas period, further underlining their credentials as genuine challengers in the grocery market. And with Aldi planning to double the number of its UK stores by more than 1,000 by 2022, and Lidl ploughing £220m into expansion over the next five years, the sustained attack on Sainsbury’s customer base is here to stay.

Wage worries on the slide

The effect of pressured household budgets has of course played a huge part in shoppers flocking into the arms of the discounters. So signs that an improving British economy is finally having a noticeable effect on consumers’ pay packets will come as a welcome relief to Sainsbury’s.

Data from the Office of National Statistics released this week showed the average wage rise 1.8% in the year to November, accelerating from 1.6% in October and the fastest rate of growth for two years. At the same time unemployment slipped to 5.8%, the lowest since September 2008.

The better product quality at Sainsbury’s versus mid-tier rivals Tesco and Morrisons puts it in a better position to capture trade from consumers wishing to finally splash out, but who don’t want to quite stretch the boat out as far as filling their baskets at premium chains like Waitrose and Marks and Spencer. Indeed, Sainsbury’s Taste The Difference range have proved hugely popular and sales of these items rose 5% over Christmas, a promising sign with wages now on the mend.

… but budgeteers also bulking up on luxury items

Still, Sainsbury’s will be forced to work hard to keep shifting its higher-priced items as the discounters are also busy expanding their own luxury ranges to pull the extra cash out of shoppers’ wallets.

Just this week Aldi announced it would begin selling pheasant at its stores, and follows the roll-out of caviar, lobster and a selection of high-end wines in recent months. And Lidl introduced 59 new products across its Deluxe range in the run-up to Christmas.

Sainsbury’s has chucked vast sums of capital into product development and marketing to bolster its reputation as THE go-to place for those seeking quality at a reasonable price. But the company will have to keep its eye on the ball if it wants to counter the opening of this new front by the discounters. I believe that the firm has a lot of hard graft in front of it to stem the charge of its low-priced competitors.

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