Is WM Morrison Supermarkets plc now set to outperform Tesco plc?

Over the past two years, Tesco (LSE: TSCO) has pulled out all the stops to try and regain lost market share, grow margins and rebuild its balance sheet. 

However, the group’s sales growth has struggled to gain traction in the UK’s increasingly competitive retail environment. Meanwhile, management’s work to cut costs and get the balance sheet back on track is taking longer than expected. 

Tesco’s smaller peer, Wm Morrison (LSE: MRW) is also facing the same pressures but the company has made several moves recently that could give it an advantage over Tesco, and other retail sector peers.

Morrisons: Moving online 

Several years ago Morrisons didn’t have an online presence, something that concerned many shareholders. At the time, however, the company’s management didn’t seem to be bothered by its online defficiency as store sales continued to grow. But the rise of no-frills rivals and the structural changes the grocery industry has undergone during the past four or five years forced Morrisons’ management to change its ideas.

First off, the company launched its own online shopping portal, copying similar moves by Tesco and Sainsbury’s. Then the company signed a deal with online supermarket Ocado whereby Morrisons uses Ocado to distribute its products sold online. And earlier this year, Morrisons inked a wholesale agreement with Amazon’s online food service AmazonFresh. Under the terms of the deal, Morrisons supplies Amazon with its products and Amazon controls how much it charges customers for them.

Amazon’s new online food service is yet another disruptor for the UK grocery market, which is bad news for both Tesco’s and Morrisons, although Morrisons has sought to protect itself by linking up with the disruptor. 

Indeed, while Tesco struggles with its high cost base, a result of the company’s large network of physical stores, Morrisons will be able to place less emphasis on its store portfolio as sales through online channels (Ocado and AmazonFresh) pick up the slack. Simply put, the entry of yet another competitor to the UK grocery market may be bad news for Tesco and good news for the company’s smaller peer.

Tesco: Struggling to keep up

As well as slowing sales, Tesco has other problems to deal with, which could derail its recovery. For example, the UK’s largest retailer is still struggling with its high level of debt built up over years of (sometimes unsuccessful) global expansion. Debt amounted to £14bn at the end of 2015 excluding pension obligations and leases. To try and bring this mountain of debt under control Tesco’s management has been selling off assets, but these asset sales just aren’t producing enough cash to make a meaningful dent. 

Over the past two weeks, Tesco has pulled in around £330m from the sale of three businesses, one of which may have been sold at a loss. Moreover, City analysts believe that due to the minimum wage hike and other factors, the company’s costs will jump by £200m this year, undoing much of the work management has already done to slash costs. 

So overall, while Tesco struggles to restart sales growth and get its debt mountain under control, Morrisons has been busy signing deals that should prime the company for growth going forward.  

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Rupert Hargreaves 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.