In tough economic times, food retailers tend to offer a more defensive profile than others in retailing sector. After all, whether there's a recession or not, people will still need to eat. And a food retailer that's able to discount sufficiently will not only maintain its customer base but - as customers trade down - could even increase footfall. This has been the case with Tesco, Sainsbury and, to a lesser extent, Morrisons - despite efforts to win customers by such discounters as Asda and Lid l.
Indeed, Sainsbury reported its "best Christmas ever", with sales growth beating analysts’ expectations. It achieved a 4.5 per cent rise in like-for-like sales for the 13 weeks to 3 January. Price cuts on half of its goods and a strategy of promoting its own-brand products, which are more profitable, also helped.
Tesco, which last reported figures for the 13 weeks to 22 November, didn't fare too badly either, with UK same store sales growing 2 per cent - slightly beating consensus forecasts. Tesco’s strategy of introducing a new discount line last September has been key to that solid performance. Tesco’s Discount Brands now accounts for 5 per cent of UK food and grocery sales; a higher level than originally anticipated by analysts.
Morrisons, the UK's fourth-largest grocer, also managed impressive 8.1 per cent same store sales growth for the 13 weeks to 2 November, while snacks specialist Greggs reported a 5.3 per cent rise in like-for-like sales for the four weeks to 3 January.
But, going forward, things could get tougher. Merrill Lynch recently downgraded its recommendations on shares in Tesco, Sainsbury and Morrisons, on the basis that sales volumes of food retailers are set to decline this year and that this has not been priced into the shares of these companies.
Lower commodity prices, and weakening demand as consumers continue to trade down to cheaper brands, will mean that supermarkets will have to continue cutting prices. This in turn should hurt margins and profits. Indeed, Tesco has said that it's investing £100m in a combination of permanent price cuts and promotions. This comes less than a week after a similar announcement by Asda.
On a positive note, the closures of smaller retailers have meant the exit of capacity from the market, which should benefit bigger players. Just as significantly, this poses opportunities for the stronger, well capitalised players, to gain additional space cheaply.
That said, shares in food retailers look highly rated at present - Sainsbury's, for example, trade on 16 times forecast earnings. That would suggest that the sector's defensive qualities are already looking fairly well priced-into share prices.
Summary of sector:
| Company | Price p | Mkt. value £m | PE ratio | Yield % | 12-Month price chng % | Last IC view |
|---|---|---|---|---|---|---|
| GREGGS | 3470 | 361 | 10.7 | 4.1 | -26.2 | Good value, 3,919p, 11 August 2008 |
| MORRISON(WM)SPMKTS. | 283 | 7,442 | 17.7 | 1.7 | -11.2 | Fairly priced, 254p, 15 September 2008 |
| SAINSBURY (J) | 336.5 | 5,884 | 16.3 | 3.7 | -20.1 | Sell, 285p, 12 November 2008 |
| TESCO | 365.2 | 28,714 | 12.9 | 3.1 | -22.6 | Fairly priced, 385p, 1 October 2008 |
