Battle of the supermarkets

It has been a challenging year for UK supermarkets, but November may have turned the tides for giants Tesco and Sainsbury’s.

Both supermarkets have faced their own issues in an unfavourable climate for consumer companies in general.

Data by the Office for National Statistics shows that in the second quarter of this year the largest negative contribution to growth in consumer spending was in “food and drink”. Consumer spending in this category fell by 0.9%, compared with the first quarter of the year.

However, since the beginning of the month, shares in both supermarkets have recovered somewhat. This morning, Tesco trades at 194.21 pence, and Sainsbury’s at 265.00 pence up from lows of 168.75 pence and 224.80 pence, respectively, in October.

Tesco may have its Christmas campaign to thank for this boost. Getting in early on Remembrance Sunday, the supermarket released an advert featuring an enormous light display put together at a store in Wigan in the UK in response to customer’s tweet.

Sainsbury’s may have missed Rememberance Sunday, but its Christmas campaign advert, released today in partnership with the Royal British Legion, depicts the World War One truce football match from Christmas Day 1914. It has received positive reviews.

Whether the Christmas period will be enough to turn things around for the supermarkets remains to be seen. Tesco has already suffered badly this year after an investigation by Deloitte discovered overstated profits resulting in a criminal investigation by the Serious Fraud Office.

Sainsbury’s was also recently in the spotlight, when a “50p challenge” poster, encouraging employees to get customers to spend more, mistakenly appeared in a London store window, leading to mockery.

A number of UK food retailers have seen share prices fall in recent months and short sellers have been targeting not only Sainsbury’s and Tesco but also WM Morrison Supermarkets and Marks & Spencer. Meanwhile, low-cost competitors Lidl and Aldi have eaten into the market share.

Tesco’s latest interim statement shows group sales fell by 4.4% to £34 billion, and UK like-for-like sales were down 4.6%. Pre-tax profits declined to £112 million, with Tesco admitting that the Deloitte investigation had an impact of £263 million.

Chairman Richard Broadbent says recent events are “a matter of profound regret” and states that a new management team is in place to address the causes of the accounting error.

Dave Lewis, chief executive says the three immediate priorities are “to recover our competitiveness in the UK, to protect and strengthen our balance sheet and to begin the long journey back to building trust and transparency into our business and brand.”

Sainsbury’s interim statement, released this week, shows a pre-tax loss of £290 million, with underlying group sales down 0.3% and like-for-like sales down 2.1%. The report explains that, with customers shopping more frequently online or in convenience stores, Sainsbury’s larger stores with underutilised space will partner with other businesses to offer more non-food products.

Analysts’ views on the supermarkets are mixed. Nicla Di Palma, equity analyst at Brewin Dolphin wealth management, describes a “tumultuous” year for Tesco: “We do not believe that now is a good time for holders to rush and sell their shares. However, given uncertainty on its strategy and the risks of implementation, we view the risk and reward as balanced at this point.”

Garry White, chief investment commentator at Charles Stanley, says the outlook for Sainsbury’s is unclear: “Forecasts for the second half of the year are expected to move lower and it is unclear whether we are at the bottom of the downgrade cycle. It is likely that we are not.

“So, much uncertainty remains and [yesterday’s] statement did not do anything to make it any clearer, with the decision regarding the dividend appearing indecisive to some.”

Justin Cooper, chief executive officer of shareholder solutions at Capita Asset Services, says the supermarkets’ battle will continue: “Sainsbury’s and its rivals are clearly having to scrape the barrel to fund their price war, taking a hit on profits and forecasting dividend cuts over at least the next six months. It looks certain that the battle will rumble on.

“Looking at the bigger picture, we forecast that dividends by UK companies won’t show any progress in real terms this year, but will start to pick up in 2015. However, with competition between supermarkets only set to get fiercer, the overall sector is going to be a bad place to look for dividends in the coming years.”

©2014 funds europe



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