Tesco plc And Morrisons plc Are On Sale: Should You Buy?

In the 1990s Vodafone was the leading mobile phone company in the country; it had the best coverage, the most subscribers, and its share price rose steadily higher. Firms like T-Mobile, O2 and Orange were also-rans.

Fast forward to today, and Orange and T-Mobile don’t exist. But far from having failed, they merged to form EE that was then acquired by BT to become a telecoms mega-giant. Vodafone, while certainly an also-ran is just one of a crowd. You see things change in business, and they change far more quickly than you’d expect.

You can’t stand still

The supermarket sector in Britain today is also going through dramatic change. The middle and lower end, including firms such as Tesco (LSE: TSCO)Morrisons (LSE: MRW) and Asda, are getting squeezed by competition from Aldi and Lidl. The upper end is growing, as a British middle class flush with cash is shopping at Sainsbury’s, Marks & Spencer and Waitrose.

That’s why the premium supermarkets are still profitable, while Tesco and Morrisons have struggled on the profits front. And nobody can stand still in this industry. Sainsbury is buying Argos in a bid to grab market share outside of the low-margin foods sector, while Morrisons has agreed to provide hundreds of fresh and frozen products for online firm Amazon (NASDAQ: AMZN). Tesco has rapidly expanded its online business, and is now the UK’s leading internet trader. But Amazon’s deal with Morrisons shows it wants to take back that crown.

After all this to-ing and fro-ing, who comes out as the winner? Well, I’ve always been impressed by Tesco as a business, but I fear it may turn into a Vodafone, as the mid-market leader gets out-manoeuvred by its nimble rivals’ deals. I would have to see real evidence that this company is turning round and the profits are recovering before I buy-in.

Too soon for Morrisons?

What about Morrisons? Well like Tesco, the price looks cheap, but profits have been crunched. However the new venture with Amazon makes a lot of strategic sense. Morrisons’ main weakness was that it has concentrated on bricks rather than clicks. In one fell swoop this move solves that problem. It will be interesting to see if the joint venture is branded as Morrisons or Amazon.

However, I remain to be convinced. If, after a year or two, profitability starts to recover, that would be the time to invest. Premium retailers such as Marks & Spencer and Sainsbury would be a better bet.

There’s only one thing you need to watch for when looking to buy into a business. Is it, or will it be, profitable? If it fails that test, then you should remain on the sidelines.

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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.