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Can Christmas Save J Sainsbury plc And Tesco plc?

Christmas is a time for peace and goodwill to all men… unless you’re fighting for your life in the embattled grocery sector. The supermarkets have been riven by a costly price war this year and with discounters Aldi and Lidl continuing to gobble up market share, hostilities will only harden over the festive campaigning period. Can embattled chains J Sainsbury (LSE: SBRY) and Tesco (LSE: TSCO) emerge victorious?

Festive food fight

I fled the grocery battlefield a couple of years ago but have watched Sainsbury’s admiringly from a distance as it held its upmarket territory against the cut-price German bruisers. The years of hard work building brand and customer loyalty have paid off, whereas Tesco has been punished for its growth-at-all-costs strategy that alienated customers just at the wrong time.

New figures from Kantar WorldPanel published today show Sainsbury’s the clear winner among the big grocery chains in the 12 weeks ending 6 December 2015. While total grocery sales rose just 0.1% year-on-year, Sainsbury’s managed 1.2%, which is pretty impressive giving today’s tough conditions. Tesco’s misery continued, with sales dropping 3.4%, as did sales at Asda. Meanwhile Wm Morrison saw a 2% drop in sales.

Tasty!

The dismal performance by its rivals underlines just how well Sainsbury’s has done to boost sales in this market, which has also slightly lifted its market share to 16.7%. It has now grown faster than the wider market for three months in a row, helped by the popularity of its Taste the Difference range of upmarket foods. With sales of champagne and sparkling wine up by a quarter, Kantar says it’s successfully tapping into demand for premium goods.

Cantor also suspects Christmas will be more cheerful for Sainsbury’s on the back of its popular Mog’s Christmas Calamity advert. It typically does well at this time of year, because of its focus on food, and if it really has cracked the premium food market it should reap the rewards.

Cheap isn’t cheerful

Tesco has been hit by the move away from large out-of-town sites in favour of discounters and convenience stores, but it has cashed in on the trend for online grocery shopping with the success of Tesco Groceries. Yet I can see it losing more ground as people trust more of their Christmas shopping to Aldi and Lidl. Their sales are up 5.4% and 17.9%, respectively, year-on-year and they hope to attract 10 million shoppers each over the Christmas period.

The Sainsbury’s success shouldn’t disguise the fact that this is still a really tough sector to be in. Margins are being squeezed as all of the supermarkets cut prices, particularly on staples like eggs and butter, with the cost of everyday groceries down 1.9% in the last month. Operating margins at Sainsbury’s are down to a wafer thin 0.3%, according to Digital Look, while Tesco is in negative territory. Both have been forced to slash their dividends. 

A merry Christmas at the tills could set up Sainsbury’s for a happier 2016, but I foresee more seasonal misery for Tesco.

The grocery sector is still too risky for my tastes, especially since there are far more exciting growth opportunities out there.

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Harvey Jones 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.