The Tesco (LSE: TSCO) share price has been going up. At 214p or so, it’s around 13% higher than it was at the beginning of the year.
Last week’s release of the Q3 and Christmas trading statement revealed sales up a smidgeon compared to last year, at 0.5% in the third quarter and 1.5% over the Christmas period.
Up a bit, down a bit, and up a lot!
Ok, but rival supermarket chains Sainsbury’s and Morrisons also reported during the week. Sainsbury’s sales were down a bit, and Morrison’s sales were up a bit. I get the impression that these big supermarket companies are slugging it out over scraps.
If you contrast the results with what Aldi UK had to say, the picture changes. The British arm of the German discount supermarket revealed a sales rise of 10% in the Christmas week compared to the previous year’s equivalent because of demand for its ‘premium’ ranges. That’s what I call progress, not the minor ups and downs the bigger supermarkets keep posting. And of course, the likes of Aldi, Lidl and others are eating up market share at a fast pace, stealing it, if you will, from Tesco, Morrisons, Sainsbury’s and others.
Aldi is now the UK’s fifth largest supermarket company and reckons its sales almost hit £1bn in December. If you still don’t see these discount retailers as a significant threat to the long-term future of Tesco, Sainsbury’s and Morrisons, do you think the situation will get better if we see an economic downturn in the UK? I think a recession would only strengthen the hands of Aldi and Lidl and put even more pressure on Tesco’s business along with those of Morrisons and Sainsbury’s.
The battle for market share
Aldi opened more than 65 new stores in the UK during 2018, taking the store estate up to 827. The directors have got their eyes on achieving 1,200 UK stores by the end of 2025. But what happens after that? Brand awareness will have increased even further, which could lead to even greater traction in the market for Aldi. What will the next target be? Aldi’s share of the total UK grocery market stands at 7.6% according to recent industry data and rising fast.
In fairness, I reckon investors are nervous about Tesco’s prospects because, at around 213p, the share price has plummeted about 20% since August, despite shooting up during the first week or so of this year. Even now, the furthest-out City estimates for normalised earnings to February 2020 put them at less than half what they were seven years earlier. I feel certain that the long-term trend for the low-margin Tesco business will be down, so I wouldn’t entertain a long-term investment in the shares now. When it comes to the Tesco share price today, I’m ignoring it and looking for better investments elsewhere.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.