1.4m Reasons Why Change Is Coming To Tesco PLC & WM Morrison Supermarkets PLC

Recent news that Aldi and Lidl plan to open around 1.4m square feet of new stores this year made me stop and think — especially when I read that Asda, Sainsbury’s, Wm Morrison Supermarkets (LSE: MRW), Marks & Spencer and Tesco (LSE: TSCO) plan to open a further 2m square feet of store space.

According to figures taken from an Investment Property Databank (IPD) report and published in The Telegraph, a total of 3.9m sq. ft. of new store space will be added to Britain’s grocery industry this year.

What’s happening is clear — smaller, better-located stores are being opened, and are stealing sales from older, larger stores.

Tip of the iceberg

The big four supermarkets are all being forced to admit that their property portfolios aren’t worth as much as they used to be.

For example, Sainsbury’s recently said that 25% of its stores are too large, while Morrisons reduced the value of its property portfolio by 16% in its recent results.

Aldi and Lidl are stealing weekly shop purchases from larger stores, which are increasingly underused. At the same time, home delivery shopping is rising, and shoppers are making more frequent small purchases at convenience stores.

The result, in my view, is that we probably have too many large supermarkets in the UK — and I reckon many of them could end up closing.

4 become 3?

I can see three possibilities.

Firstly, there could be a high-profile casualty in the supermarket sector. Alternatively, each of the big four could be forced to downsize and accept a lower market share, while remaining independent.

Neither of these outcomes are likely to be good for shareholders.

The third possibility, which I think is increasingly likely, is that the UK’s big four supermarkets will become three, probably as a result of a takeover. In my view the most logical combination would be Tesco and Morrisons, both of which target similar customers.

Tesco would benefit from Morrisons’ mainly freehold property portfolio, while Morrison’s profitability could probably be improved with Tesco’s purchasing power and technology.

It’s worth remembering that Morrisons’ current chairman, chief executive and finance director are all ex-Tesco, while Tesco’s new chairman, John Allan, has a track record of orchestrating big mergers — most recently of Dixons and Carphone Warehouse.

Of course, I’m not suggesting you buy shares in Tesco and Morrison in the hope of a takeover — such a strategy would be a high-risk gamble.

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Roland Head owns shares of Tesco and Wm Morrison Supermarkets. 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.