Tesco shares, it seems, enjoy the status of a safe haven. The supermarket chain sells groceries and other essentials. But are the shares a buy right now?
High supermarket sales
As we all know, in the beginning of the Covid-19 crisis many people panic-bought essentials. This led to a dramatic rise in many supermarkets’ sales revenues. Tesco also benefitted from this stockpiling, and its sales grew by 12.7%. However, some analysts argue that the pandemic also led to a large boost in online shopping at the expense of traditional supermarkets. Ocado‘s sales, for example, increased by a hefty 32.5%. On the other hand, many traditional supermarkets launched food delivery services. In this way traditional supermarkets are able to compete with pure online supermarkets.
Although the coronavirus-related rise in online shopping might seem like a one-off or a non-recurring event, I don’t think it is. It’s logical to think that many people will resume traditional shopping after the end of the pandemic. But some will continue ordering groceries and other essentials online for the sake of convenience. I also see another reason for high volumes of online deliveries in the near future. The second wave of Covid-19 is already there. Even though some analysts don’t think it will lead to the second lockdown, many consumers will still prefer to continue shopping online.
Tesco’s competitive position
What does it mean for Tesco shares? Well, the supermarket will probably adapt to the new reality. It offers food delivery services, although it cannot meet all the consumer demand right now. According to its website, the time slots for online deliveries fill up very quickly. But I see that there is a lot of potential for Tesco to improve and grow its online shopping unit.
Tesco is by far the largest supermarket chain in the UK, which a market share of about 27%. Its size is a great competitive advantage. Tesco’s rival, large discounter Aldi, has 7.7% market share in the UK, taking second place in the country. Tesco lost some of its customers to Aldi during the great recession of 2008–09 because of Aldi’s low pricing. Tesco must be concerned about something similar happening now. The supermarket chain has asked its suppliers, including some famous brands, to match their pricing to that of Aldi. Tesco itself will also have to reduce its profit margins.
Although this strategy might be devastating for Tesco and its suppliers, it will also be painful for Aldi. In fact, Aldi might lose that price war. Even if it doesn’t, Tesco will, at least, avoid losing its market share to the discounter. Tesco reports its earnings tomorrow, so, we shall see how the Covid-19 has really affected its revenue and profit.
Here’s what I’d do
The supermarket’s valuation isn’t high. It’s trading at a price-to-earnings ratio of about 17. At the time of writing, Tesco’s shares traded at 225p per share, whereas the stock’s 52-week trading range is 203.70p to 260.40p. It seems to me that there is potential for growth. Although Tesco’s competitors and the price war make the future look uncertain, the supermarket is rather a safe haven now.
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Anna Sokolidou has no position in any of the companies mentioned in this article. 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.