Supermarket Sweep - grocers to put on your Christmas list

But as well as competing against each other, the big four: Walmart-owned Asda, Sainsbury’s (SBRY), Tesco (TSCO) and Morrisons (MRW), face two potentially bigger rivals: the ‘heavy discounters’ Aldi and Lidl, and the posh nosh grocers Waitrose and M&S Food. Indeed, the big four have seen their grip on the market loosen over the past year as these smaller food retailers steal market share. All of them, plus the Co-operative, lost share in the 12 weeks to 10 November. Aldi, however, recorded an all-time high of 3.9 per cent following 16 per cent year-on-year growth, and basket sizes swelled by nearly as much, according to figures from Kantar Worldpanel. Almost a third of British households shopped at Aldi during the period and sales at fellow German retailer Lidl grew by 13.8 per cent too. Meanwhile, Waitrose won further market share - a trend unbroken since the middle of 2009.

These figures reflect an ongoing shift in shopping behaviour in the UK. Frequenting Aldi and Lidl no longer carries the same stigma as it did just five years ago. Consumers have also come to realise that the quality of the food there can actually be very good. Household budgets remain under pressure, too, so families are increasingly doing smaller shops, but more frequently, to cut down on food waste. They now tend to buy bulk goods at the discounters, while choosing more up-market brands for something special. That means actual industry volumes are flat or declining, so any revenue growth among the big four is largely down to price inflation, rather than volume growth. And, as we spelled out in last week's cover feature, despite falling unemployment, rising GDP and improving consumption, productivity remains low, real wages are still declining and household debt is still high, so people aren’t actually any richer. Even if they were, it’s unlikely they would choose to increase their weekly shopping bill. Given the UK's listed supermarkets are in for a tough Christmas, we pick out who we think the winners, and the losers will be.

J Sainsbury

Compared with listed rivals Morrisons and Tesco, Sainsbury’s is clearly the sector champion. Under the tenure of chief executive Justin King, the supermarket has been consistently increasing its share of the market and growing sales against a very difficult economic backdrop. In fact, market share hit a decade-high of 16.8 per cent in September following 35 consecutive quarters of like-for-like sales growth - peers have been reporting declines on both fronts. Success has been reflected in its share price, up 13 per cent over the past 12 months compared with a 3 per cent fall at Morrisons and a 1 per cent decline at Tesco. We see further upside, too. Debt is under control and Sainsbury's has not chased growth overseas, a tactic which has proved so costly for Tesco. The stores are well presented, the quality is good and the company's voucher programme is a stroke of genius as it not only tempts shoppers back but gives the company a gold mine of customer data. A dividend yield of 4.3 per cent is the cherry on the cake. Buy.

Tesco

This year has been a hard slog for the UK’s largest supermarket. But many of Tesco’s woes are in fact rooted in its overseas operations. It pulled out of Japan two years ago and recently sold off its disastrous US business, Fresh and Easy. European operations face stiff competition from hard discounters, too. Having failed to crack the Chinese market, Tesco has entered into a joint venture with China Resources Enterprise to merge their stores. A third-quarter update revealed the extent of the challenge, with comparable sales down 1.5 per cent in the UK and 4.6 per cent abroad. Admittedly, Tesco is tackling problems at home by revamping its general merchandise offer and reducing the amount of new space it opens. The 'Finest' range has been re-launched, shabby stores are being refurbished and there's more investment in the online grocery service. Still, as we said recently, turning around Tesco's fortunes will take some time and a great deal of money. Sell.

WM Morrison

When a company with an annual turnover of £18bn starts to tighten its belt by cancelling window cleaning at its stores, you know things must be pretty dire. This week Morrisons confirmed it had scrapped window cleaning for two months, as it was "less important to customers at the darkest time of the year". The news followed a 2.4 per cent drop in like-for-like sales in the third quarter, which management blamed on weak consumer confidence, heavy promotional activity and a lack of exposure to online and convenience channels. Chief executive Dalton Philips seems to believe the supermarket can move into positive like-for-like growth in the fourth quarter and is on track to hit full-year profit forecasts. If that happens, it would only be down to extremely weak final-quarter comparatives as December is proving fiercely promotional, and, pitted against a swathe of better-placed rivals, it won't get any easier. Morrisons launches internet shopping in January in conjunction with Ocado (the terms of which are extremely onerous for Morrisons), but probably won't generate an operating profit before 2017/18. It doesn't operate a club card system, either,which means it lacks the kind of vital consumer data that Tesco and Sainsbury's use to great effect. Capital spending is rising, too, as Morrisons plays catch-up online, rolls out convenience stores (finally) and spruces up shabby outlets. Net debt is a growing burden. Sell.

Ocado

Shares in Ocado (OCDO) have soared spectacularly over the past 12 months, but we've been cautious given regualr losses over the past five years. The good news for the online-only grocer is that a licensing deal with Morrisons seems pretty lucrative. It will virtually wipe out debt, offer a much-needed revenue boost and be "significantly" earnings-accretive, even in the first year, thanks largely to service fees and cost sharing. This also suggests Ocado might have success licensing out its intellectual property to other retailers - although under the deal with Morrisons it can’t provide online grocery services in the UK to more than one of Morrisons' competitor at any one time for the next quarter of a century. Orders are growing and sales are rising in the double-digits, but so are costs. In May, the company posted a half-year loss of £1m even before exceptional charges. Hopefully, the cost sharing arrangement with Morrisons should ease this. But, with the shares rated at a significant premium to peers, the good news seems factored in. Hold.

Booker

Booker Group (BOK) shares have jumped 75 per cent since we recommended tucking into them in July 2012, fuelled by strong sales, steady margin growth and superior returns on equity. But Booker's acquisition of Makro last year is also beginning to bear fruit. Trading is already better than expected and boosting profits, while cost savings are on track, too. True, the shares aren't cheap, but armed with a strong balance sheet and with more benefits from Makro to come, we feel that's justified. To top it all off, the wholesaler promises to return £60m to shareholders next year. Buy.

Ahold

Dutch grocer Koninklijke Ahold (AEX: AH) is well run with plenty of cash. It had a good first six months of the year, margins are steady and Ahold continues to gain market share in the US, where it's well-placed to benefit from an economic recovery. That said, third-quarter sales were soft both there and in the Netherlands, and management expects this to continue into the fourth quarter. What's more, a decision to return a further €1bn (£838m) to shareholders on top of the current €2bn share buy-back program fell short of market expectations. So, with sales softening and the good news factored in, we see limited scope for a re-rating and downgrade the shares, which now trade on a punchier forward PE ratio of 13, to a hold.