"Is M&S becoming like any other supermarket?" was the teaser the company's chief executive, Marc Bolland, posed to himself in his long-awaited strategy review. The answer, he concluded, was "yes", and decided that M&S will shift back towards a more speciality offering, starting with a reduction in the number of third-party brands it sells. He also ruled out an online delivery service, suggesting that with a significantly lower basket size than more mainstream supermarkets the economics simply didn't stack up.
While a key plank of M&S's UK food strategy is to leverage under-utilised space better, it does plan to add some new Simply Food outlets, in line with the huge expansion taking place across the industry. Morrison said last week that it's on target to open 400,000 sq ft of new space this year. Sainsbury added 540,000 sq ft of new space in its first half, including its first 100,000 sq ft store, and is well on the way to adding 15 per cent of new space by 2012. It reported pre-tax profits up 8 per cent to £332m in the six-month period.
Although new space has proved a good short-term method for boosting growth, some analysts are worried that the 25m of sq ft to be added over the next four years could have a damaging long-term effect on industry returns. Analyst Dave McCarthy at broker Evolution Securities suggests capacity growth is outpacing demand growth, and is already starting to show through in weakening like-for-like sales growth, which he points out are currently at levels "unimaginable" two years ago. Sainsbury this week reported total sales growth of 7 per cent in the first half, but like-for-like growth of just 2 per cent; Morrison's third-quarter underlying sales growth was even lower at 1.3 per cent. "Low like-for-like growth could be the new norm," says Mr McCarthy.
He also doesn't believe that rising food inflation will be a panacea for the industry woes, suggesting shoppers will trade down and consume less rather than stomach price increases. But others believe a return to a more beneficial level of inflation between 2 and 3 per cent would be "enough to boost the top line without being so high as to scare consumers", according to analyst Tom Gadsby at broker Matrix.
We're sticking to our view that a little inflation will be good for the industry, and are less concerned about the industry's space expansion given much of it will be allocated to non-food. Sainsbury (373p) is leading this charge, and is currently growing faster than rivals. But, along with perennial takeover speculation, that's fully reflected in a premium forecast PE ratio of 15.