In the last ten years there has been a seismic shift in the UK supermarket sector. Where a decade ago the likes of Sainsbury’s (LSE: SBRY) and Morrisons (LSE: MRW) were dominant players in the industry and were talking of expansion and possible M&A activity, today they are being crowded out by cheaper rivals such as Aldi and Lidl.
Certainly, neither Aldi nor Lidl are doing anything particularly ground-breaking. They are very simple businesses that have offered consumers exactly what they want: low prices and decent quality products. And, with the advent of the credit crunch causing disposable incomes to fall in real terms for a number of years, more and more shoppers have turned to no-frills, discount options to slash their shopping bills, thereby providing the likes of Aldi and Lidl with a tailwind.
Furthermore, the likes of Sainsbury’s and Morrisons have also struggled to keep up with changing consumer tastes in other areas, notably convenience and online. In fact, in the last handful of years, making multiple trips to a store each week has gained in popularity, with deliveries of groceries also beginning to take off.
In the case of Sainsbury’s, it has deployed a relatively sound strategy of opening more convenience stores in recent years and also improving its website. However, Morrisons has been a step behind its peers and only launched an online offering last year, with its convenience store rollout still being considerably behind that of its peers. And, with both Sainsbury’s and Morrisons having large, out-of-town superstores, they have struggled to be as nimble as they perhaps would have wished to have been, with resources arguably not being focused on their most efficient or lucrative area.
Despite a changing landscape and exceptionally high competition, Sainsbury’s and Morrisons could still occupy dominant positions in the UK supermarket sector in the medium to long term. A key reason for this is that, economically, the next decade is likely to be a whole lot better than the last one. As such, the relentless focus on price is likely to dissipate somewhat as disposable incomes rise in real terms, which is likely to aid margins and also play to their strengths of having more staff, better customer service and a wider range of products than many of their peers.
Furthermore, Sainsbury’s and Morrisons both have excellent finances and are able to invest heavily in their estates in order to fully match customer expectations. Their strategies also appear to be relatively sound, with considerable investment in staff, refreshing stores and a reduced focus on price-matching all being prudent measures to help stimulate their top and bottom lines.
And, with their shares trading on forward price to earnings (P/E) ratios of just 12.4 (Sainsbury’s) and 13.8 (Morrisons), they appear to offer a sufficiently wide margin of safety to warrant investment at the present time. Certainly, the road to improved performance may be a long, gradual slog, but for patient investors who can live with a degree of volatility, the likes of Sainsbury’s and Morrisons could prove to be winning investments.
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Peter Stephens owns shares of Morrisons and Sainsbury (J). 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.