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Tesco and Sainsbury’s shares: why I’m still not touching them

Tesco (LSE: TSCO) and J Sainsbury’s (LSE: SBRY) shares appear to offer value right now. After a strong run earlier in the year, Tesco’s share price has pulled back by around 10% over the last six weeks, putting the stock on a P/E ratio of around 13.3. Meanwhile, Sainsbury’s shares have fallen significantly over the last few months after the planned merger with Asda fell through and now trade on a P/E of just 9.3.

However, despite these low valuations, I’m still not tempted to add these stocks to my portfolio. That’s because, in my view, the landscape for these supermarkets is likely to remain extremely challenging.

Challenges

Only a few weeks ago, I was discussing the persistent threat that the German discount supermarkets Aldi and Lidl present to the big four supermarkets. With the low-cost rivals looking to open hundreds of new stores across the UK in the next few years (including smaller local stores that are likely to be a hit with consumers), the likes of Tesco and Sainsbury’s are going to find life quite difficult in my opinion.

No growth

Recent statistics appear to back up my view. For example, according to the latest data from Kantar Worldpanel, the UK’s big four supermarkets all failed to register to growth in the 12 weeks to 19 May. For the period, Tesco’s sales were flat, while Sainsbury’s sales declined 1.7%.

Meanwhile, their low-cost competitors continued to make strong progress, with sales at Aldi jumping 8.5% and sales at Lidl surging 11.1%. Clearly, there’s a big difference in momentum here. Chris Hayward, consumer specialist at Kantar, commented: “The discounters continue to attract customers with nearly one million more households visiting Aldi compared with last year and an additional 630,000 shopping at Lidl.”

As a result of this lack of growth, both Tesco and Sainsbury’s have lost market share recently. Tesco’s market share has now fallen to 27.3% from 27.7% a year ago, while Sainsbury’s market share has declined to 15.2% from 15.7% a year ago. At the same time, Aldi and Lidl now have a record high combined market share of 13.8%.

Other threats

Aside from the German discount supermarkets, there are other threats that could also derail growth at the retailers. One clear threat is Amazon, which launched its AmazonFresh business here in the UK in 2016 and is looking to beef this up in the near future.

Prices at AmazonFresh are considerably lower than prices at the big four supermarkets. For example, research last year found that a basket of 50 different goods at AmazonFresh was 11% cheaper than the same basket at Tesco and 19% cheaper than at Sainsbury’s. With that kind of price discrepancy, I think the big four should be worried, as Amazon could potentially grab a large slice of market share as consumers continue to embrace online shopping. 

So overall, the outlook for Tesco and Sainsbury’s looks challenging in my view. As a result, I don’t see much appeal in the shares of either company. I think there are much better stocks in the FTSE 100 to invest in right now.

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Edward Sheldon has no position in any shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. 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.