The European grocery sector has a very different look and feel to the UK. There are generally a lot more smaller but still material businesses, often with a limited local market (often a single nation or region), but the most notable difference is that the market leaders are privately owned – most of the largest European operators are not listed. Indeed, in the top 10, two are British, and only one is listed – (Carrefour (FR:CA)).
And unlike the UK, where some leading businesses (Morrisons and Asda) were taken private from a public listing, the likes of E.LeClerc, Auchan, Edeka, REWE and the market leaders Lidl and Aldi remain largely under family ownership. There are also sizeable franchise operations such as the Netherlands' Spar or large co-operative organisations such as Coop across the continent or Système U in France.
This can make for very different operational and investment (capital allocation) dynamics, with businesses able to take longer investment time frames – would external shareholders in a listed Aldi or Lidl have been happy to support a drive to tear a 15 per cent hole in the UK grocery market? Probably not.
European retail sales have not been the most attractive in recent years, with the larger economies (Germany, France, Italy and Spain) often in negative territory. Overall, total retail sales across the eurozone have hovered either side of zero for the past 10 years. France has been a major drag, showing almost no improvement in this period. Germany has been a little stronger but very volatile. The better markets have tended to be the smaller economies such as Portugal and a clutch of nations in central and eastern Europe.
Overall, this has not really been a sector that stands out as one to buy into, with the likes of Carrefour making a total shareholder return over five years of just 3.5 per cent (negative 45 per cent over 10 years) while Casino (FR:CO) shares have lost 99 per cent in the last five years.
There are inevitably some pockets of better performance across the continent but investors have to work quite hard to find reliable returns. As we have seen in the UK, the main area of growth has been value-oriented, with the Aldi/Lidl axis serving as a good proxy for the whole market. What’s more, the hypermarket format seems now to be more of a burden for shoppers, and smaller format stores look to be winning shoppers’ interest.
So where do investors look in this sector?
We would avoid Carrefour, which seems to be trapped in the doldrums. Sales look to have stepped up a little recently, but this is more to do with inflation and a post-Covid-19 rebound. Revenues have moved up very little in the past 10 years; profits likewise. There is a drive to lower costs, push more into value ranges and online sales are improving (but this is not a great area of profitability) – and perhaps there are too many unpopular hyper-format stores. There was a failed bid for Carrefour last year (government-blocked) and an attempt to form some kind of alliance with Auchan fell through due to disagreements on respective values. This could be a recovery story, but the way ahead here does not look easy.
Casino, once a €10bn-plus (£8.5bn) market cap business, now has a market value of just €66mn. This brand was crushed by excessive debt, which spilled over into poor performance and a refinancing package that very heavily dilutes existing shareholders. Now the Casino stores are to be sold to Auchan, leaving just the Latin American food retail operations. This could be a recovery stock, but equally a trap to dilute equity holders out of existence – investment here feels like a coin flip.
This is a great example of where a business can still have a substantial intrinsic value but little or none of that value accrues to the main body of equity shareholders. Instead, banks or new shareholders making large capital injections effectively dilute the common shareholders almost to nought.
It is better to look in the smaller markets for good performance and investment value and with two of the strongest retail markets in the EU being Poland (10 per cent growth) and Portugal (13 per cent), there are interesting opportunities there.
Dino Polska (PL:DNP) is a food retailer selling solely in Poland, operating only in small-to-medium sized towns (max population 5,000; this covers 80 per cent of the population) and expanding rapidly with no dent to the trend even during the financial crisis and Covid-19. Profits have grown at 35-40 per cent compound in the last five years and there is 27 per cent growth in the forecasts for the next three years. Total shareholder return (TSR) has averaged around 34 per cent over five years. It also makes high margins for a grocery business at >7 per cent Ebit. This is a strong operating model and has really struck a chord with consumers who relish the local nature of the stores, the stock and the pricing especially when compared with local independent retailers that have high mark-ups.
The shares did step back a little recently, injecting some better value and at a price/earnings (PE) of over 20 times they can look expensive, but for this rate of growth and the strength of its niche, the rating is going to be high. One potential issue is that the reporting seems only to be in Polish but these days that is readily overcome.
Jeronimo Martins (PT:JMT) is a Portuguese-listed company that sources about a quarter of its revenue locally but the bulk again in Poland. In Portugal, it runs Pingo Doce super- and hyper-markets (a joint venture with the Netherlands’ Koninklijke Ahold Delhaize (NL:AD)) and Recheio, a cash-and-carry wholesaler. The balance primarily flows from Poland, where JMP owns Biedronka, the largest chain (>2,800 – combined Aldi and Lidl have only around 1,050) of no-frills supermarkets which has grown steadily from just 250 stores in 1997, when JMP acquired the brand. The USP at Biedronka is provision of a wide range of fresh produce at low prices (sometimes harder to find other chains) embracing a rapid evolution in Polish eating habits back to fresh foods.
While growing less rapidly than Dino, we still saw a 15 per cent compound annual growth rate (CAGR) in Ebit here in the past five years. This is likely to slow but still be at around 7-8 per cent growth in the next two to three years, and could accelerate as Biedronka is now being taken beyond Poland.
After a very strong run since 2018 (24 per cent TSR), the shares have slipped since July 2023 when management clipped growth expectations. With forecasts only down by less than 3 per cent and the shares lower by almost 30 per cent, there was good value here, but much was clawed back in an autumn rally. The shares have been weakening again recently as a number of analysts have switched from buy to neutral, so it is perhaps one to watch rather than to consider for investment.
Ahold Delhaize is a Dutch and Belgian dual-listed business but one that generates two-thirds of its revenues in the US through mid market brands such as Food Lion (mid-Atlantic), Hannaford and Stop & Shop (both New England) alongside many market-leading brands in the Netherlands, Belgium, the Czech Republic, Greece, Luxembourg, Romania and Serbia plus two joint ventures in Portugal and Indonesia.
The US feels a good place to be right now, with inflation seemingly well under control, strong GDP growth and robust rates of job creation. The market is coming off a couple of years of spectacular growth (+15 per cent in 2021 and 7 per cent in 2022 largely due to stimulus cheques) but is still forecast to grow at a rate of more than 3 per cent through to 2028. That said, Aldi is making a concerted push into the US market, and in the UK we have seen how far and fast market share can change. Markets in central and eastern Europe are also growing rapidly as chains steadily replace local independents.
Global diversity is also a plus here, as is the group’s supply chain, which is seen as being one of the more robust in the industry. It lags the competition in the online channel, but is addressing this – partly helped by the decision to exit the ‘dark warehouse’ sector with the sale of FreshDirect to Getir in late 2023.
The shares do look undervalued on barely a double-digit PE ratio, especially given higher ratings in the US sector, and more so for retailers with a broader footprint than just food. US consumers seem increasingly to prefer the broader ranges of Walmart (US:WMT), Target (US:TGT) et al than food-only (and US grocery stores are much purer on food than most UK supermarkets) so potentially changing to a broader retail platform could also push up the rating. Walmart et al attract PEs in the mid to high teens.
Analysts are generally positive here, and on average see potential share price gains of 15 per cent-plus with a yield of more than 4 per cent: we might well see double-digit TSR. The shares have derated since last summer when growth guidance was pulled back by c7-8 per cent, but the shares fell by closer to 15 per cent; they may now have bottomed out and started to close up this gap in the valuation.
In our final look at the supermarkets, next time we look at the sector in the US.
