The days when UK supermarkets could make operating profit margins of 5-6 per cent seem to have gone for good. Industry profitability has not recovered from the fallout of the 2008 recession. Back then Tesco (TSCO) and Asda were the price-setters, but that mantle has now passed to the discount supermarkets of Aldi and Lidl.
A decade or so ago these companies were seen as upstarts and disruptors and weren’t taken seriously by their bigger industry peers. What is now very clear is that their strategy of concentrated buying across fewer products in smaller stores has allowed them to sell groceries at prices that crushes the profitability of companies with very big stores and the costs that go with it. Walk around a Tesco supermarket today and you will see lots of banners telling customers about the products where it is matching Aldi’s prices. This is clear evidence of how the balance of power has shifted in the industry. While Tesco has done a good job using its immense scale and buying power to fight back, investors are right to question whether this will deliver growth in profits.
The internet now seems to be the main focus of growth for supermarkets. The change in shopping habits forced on many by them staying at home is likely to see many households stick with the internet for their weekly grocery shop. It is by no means certain that this will deliver big gains for investors.