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Could a supermarket price war mean trouble ahead for these share prices?

Over the last week, I’ve seen a few stories indicating that a new round of supermarket price wars may be looming. What does that mean for the share prices of the listed supermarkets?

A price war spells trouble for share prices

The major trade magazine for the sector, The Grocer, has said Tesco (LSE: TSCO) is gearing up to take on the discounters.

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It’s understandable why. According to the most recent data from analyst Kantar WorldPanel, since the start of 2018, the market share of Aldi has grown from 7% to 7.5%. Lidl has increased from 5% to 5.8%.

Now with Tesco being more focused on the UK and Ireland after pulling out of many overseas markets (including most recently from Poland), there’s a need for it to maintain market share here.

A combination of the threat from the discounters along with a struggling economy and consumer belt-tightening, means food and drink prices are likely to be under pressure.

I’ve been positive about Tesco shares recently, but a price war is unlikely to create any winners in the short term. I think the shares are now riskier. Worst hit I think will be the suppliers though, some of which are listed. I think these are best avoided along with Tesco. 

The suppliers that could be hit hard

Greencore is one of these suppliers. The FTSE 250 company is already under pressure. Covid-19 caused a sharp decline in its food-to-go categories and this has led to the group withdrawing guidance and suspending the dividend.

Pricing pressure from its customers, at a time when revenues are still only at 60% or so of where the group would expect them to be, will be very unwelcome. The shares have been struggling for a long time. I see little reason now why they will recover. Even a P/E of only 8 wouldn’t tempt me into buying these shares.  

Another supplier to supermarkets is Bakkavor (LSE: BAKK) which says on its website that it’s “the leading provider of fresh prepared food (FPF) in the UK, with a growing international presence in the US and China.

Its shares are even cheaper on a P/E of six. Like Greencore though, I see little reason to pile into the shares. I think it’s telling that while most shares have recovered a lot of the ground since the stock market crash back in March, this share price has languished. Investors aren’t expecting the future to be bright.

The group has had to take many of the same actions as Greencore. It has suspended guidance and the dividend, which both make the shares less investable. The group also saw significant sales declines in April and May during the lockdown. A supermarket price war won’t help its finances.

I’d be tempted to avoid supermarkets and their suppliers right now. The former had a ‘good’ crisis but things may be about to get more tricky with events shaping up for a new supermarket price war. 

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Andy Ross owns no share mentioned. The Motley Fool UK owns shares of and has recommended Greencore. 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.