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Is The Squeeze Finally Over For Tesco PLC And J Sainsbury plc?

To say that life has been tough for investors in Tesco (LSE: TSCO) and Sainsbury’s (LSE: SBRY) in recent years is a major understatement. In fact, both companies have endured disastrous periods, with their share prices falling by 44% and 20% respectively during the last five years.

However, with the macroeconomic outlook being strong and new strategies in place, are things finally about to get a whole lot better for both companies? Or, will they continue to get worse?

Disposable Incomes

The key problem for Tesco and Sainsbury’s in recent years has been the squeeze on disposable incomes. This has caused them to lose customers hand over first, since UK consumers have simply had lower disposable incomes in real terms. In other words, wage rises have lagged behind inflation, which has resulted in cheaper, no-frills operators such as Aldi and Lidl gaining in popularity.

However, the cost of living situation has changed. Inflation now stands at zero and this means that, for the first time since 2008, wage rises will be higher than price rises. As such, disposable incomes are set to rise in real terms this year, which could have a very positive impact on Tesco and Sainsbury’s sales.

That’s because shoppers have become increasingly price conscious in recent years, which is a very natural and understandable reaction to having less money to spend in real terms. However, now that the situation has changed, it is likely that the appeal of cheaper stores will fade somewhat and the likes of Tesco and Sainsbury’s, with their wider choice and better customer service (more staff, better organised stores), will benefit.

New Strategies

In addition to the potential for an economic tailwind, Tesco and Sainsbury’s also have new strategies that should work well in the new climate. Sainsbury’s, for example, is focusing on the quality of its own brands and on fewer discounts, which it hopes will resonate well with increasing disposable incomes, while Tesco has focused on efficiencies and rationalisation to improve its margins. As a result, both companies are forecast to deliver rising profitability in 2017.

Looking Ahead

Clearly, it has been a tough period for Tesco and Sainsbury’s, but the key takeaway is that the future will be different to the past. And, with disposable incomes on the rise and new strategies to attract customers back (as well as to improve margins), both Tesco and Sainsbury’s appear to have bright futures and are worthy of investment.

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Peter Stephens owns shares of Sainsbury (J) and Tesco. 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.