Why 2016 Will Spell Further Trouble At Tesco PLC & WM Morrison Supermarkets PLC

Following a spritely start to 2015, supermarket giants Tesco (LSE: TSCO) and Morrisons (LSE: MRW) saw their share prices rattle steadily lower during the year as shoppers continued to fly out of the door.

Tesco conceded 20% of its stock value between last January and December, while its embattled rival’s shares also sunk by around a fifth. And Morrisons also suffered the ignominy of demotion to the FTSE 250 at the end of last month.

Discounters dole out the pain

But I believe the worst is far, far from over at the troubled retailers, certainly if latest industry data is anything to go by.

Research house Nielsen recently advised that sales at Tesco slumped 3.1% in the 12 weeks to December 6th, while its London-quoted peer saw till activity fall 2.1% in the period. And the organisation wasn’t alone in announcing worrying figures — Kantar Worldpanel estimated that sales at the chains slipped 3.4% and 2% during the period.

Investors should therefore be braced for bad news when Morrisons and Tesco release their Christmas updates over the next week — Nielsen estimates that around a third of Britain’s shoppers will have used discounters Aldi or Lidl for their main festive shop in December.

Expansion hotting up

Indeed, the rise of the German giants has been the major thorn in the side of the UK’s established chains — Aldi and Lidl saw their revenues gallop 15.4% and 17.9% higher respectively in the latest three-month reporting period, Kantar says. As a consequence the shared market grab of both retailers now stands at a record 10%.

And this figure is set to head higher as the firms’ expansion plans take off in 2016 and beyond. Researcher IGD estimates that Aldi’s £600m, two-year investment drive will create 80 new stores this year, up from 65 in 2015 and taking the company’s total retail estate to more than 700 outlets.

On top of this, Aldi is also set to enter the online sphere in 2016, making it even tougher for Tesco’s and Morrisons’ own online operations, where heavy discounting is already playing havoc with profit margins. Indeed, IGD is confident Aldi will make a positive impression on the 47% of households that the supermarket doesn’t currently service.

What does the City think?

Given these factors, it comes as little surprise that the City expects both Tesco and Morrisons to experience further crushing earnings falls.

Tesco is expected to swallow a fourth successive bottom-line slip in the year to February 2016, this time by an eye-watering 45%. Meanwhile Morrisons is anticipated to endure a 16% earnings slip in the 12 months to January, a third annual decline.

And I believe further pain can be expected as the crippling price wars that accompany intensifying competition smash profits. And with Morrisons dealing on a P/E rating of 16 times — far too high in my opinion given a lack of clear earnings drivers — and Tesco changing hands on a quite-baffling multiple of 34.4 times, I believe both shares are in danger of conceding much more ground.

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Royston Wild 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.