Wages Are Growing Again But Can Tesco PLC, J Sainsbury plc & WM Morrison Supermarkets PLC Cash In?

Investors who still want to believe in the big supermarkets have to cling onto any piece of positive news these days.

A few early cost-cutting decisions by new boss Dave Lewis was all it took to convince them to pile back into Tesco (LSE: TSCO).

A 12-week spell when J Sainsbury (LSE: SBRY) didn’t lose market share had investors purring. And when WM Morrison Supermarkets (LSE: MRW) posted a 0.2% rise in sales, it almost broke the internet.

Yet this week’s news that UK wages, including bonuses, has risen 2.7% in the last year brought only brief respite to the embattled sector.

I would have thought that was a real plus, putting real money in people’s pockets, given that inflation is just 0.1%.

Weren’t the big supermarkets supposed to be losing ground to Aldi and Lidl because cash-strapped customers were desperate for discounts?

Food Fight

The news was followed by new official figures on Thursday showing retail sales up a better-than-expected 4.6% in May, suggesting consumers really are feeling more buoyant.

Food sales rose at a slower pace, 2.7%, but that was still far better than April’s figure, a 0.1% drop.

Sales grew by both value and volume, even if this was partly driven by alcohol promotions.

Aldi Wins

The underlying problem is that even if sales do rise, margins are still being squeezed by the ongoing price war.

People are still watching the pound in their pockets, even if they have more of them, in real terms.

Plus rivals Aldi and Lidl are still walking on cheap bottled water, with Which? naming Aldi named supermarket of the year on Wednesday.

Credit Crunch

Investors in the big supermarkets are constantly braced for bad news and duly received it on Wednesday when Credit Suisse posted a negative note on Tesco and Sainsbury’s, relegating them to “underperform”

It lowered Tesco’s price target to 169p (against today’s 209p) and was similarly miserly towards Sainsbury’s (219p against today’s 261p). Morrisons was deemed neutral with the target equal to today’s 176p share price.

The broker said it saw few opportunities within a sector that has historically misallocated capital, faces extreme competitive pressures and operates in a low growth environment.

Margin Call

The numbers won’t necessarily improve even if wages and sales continue on their upward path, because the sharp fall in margins will prove difficult to unwind.

I wouldn’t have guessed that Morrisons would look like the best prospect of the three FTSE 100-listed supermarkets right now. The rest, however, is sadly predictable.

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Harvey Jones 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.