Glance over the long-term share price charts of the UK’s listed grocers, and it’s clear the only solid trade of the past decade was to buy WM Morrison in early 2021, before the private equity wagons started to circle.
I mention this not only as a gratuitous reminder of our bullish write-up of the grocer from February of that year, which was both on the money and lucky. Rather, the observation is intended as evidence that this most critical of economic sectors has made for a largely rubbish investment.
Over 10 years, Tesco's (TSCO) shares have posted a 2.8 per cent negative total return. Between 2013 and its delisting at the hands of acquirer Clayton, Dubilier & Rice, even Morrisons’ shares fell short of the FTSE All-Share’s compound return. Sainsbury’s (SBRY) 22 per cent total return over the same period probably bakes in some overegged optimism around its own potential takeover.
You don’t get this sense from the public square. While the prime minister has urged the sector to act “responsibly and fairly” on pricing, Liberal Democrat leader Ed Davey has accused supermarkets of using inflation to “[rake] in eye-watering profits”. Last week, executives from the big four chains were even asked by one business select committee member if they are operating a cartel.
If the sector is a cartel, it is an unusual one. The legacy UK operators’ efforts to match Aldi on price suggest a downward pressure on the bottom line, rather than margin padding. Sainsbury’s used its trading update on 4 July to confirm that prices on its 100 most popular products “are now lower than they were in March”. It did have some positives for investors as well, as Mark Robinson explains here, but overall it was bullish for customers. In the 12 months to February, Tesco’s net margin was just 1.1 per cent, a little off a still measly five-year average of 1.7 per cent.
For long-term investors, these profits are more likely to have induced the wrong kind of eye-watering.
Of course, the drive to preserve sales volumes above all is a familiar story. As the latest Kantar data shows, the German discounters now account for 18p in every £1 spent in supermarkets, up from 7p in 2013. And although it has been the most successful of its peers in defending its market share over the past decade, Tesco’s grip on the UK market has still dipped, from 29.9 to 27.1 per cent.
Inflationary pressures notwithstanding, this has largely been good for shoppers’ wallets. Despite all the brickbats, it is also a sign of healthy competition. We can see this by charting the changes in the sector’s Herfindahl–Hirschman Index (HHI), a measure of market concentration that is calculated by adding the square root of each player’s share. An industry dominated by four equally large players would therefore score 2,500, while a complete monopoly would give an HHI of 10,000.
After growing steadily through the 1990s and early 2000s, the HHI peaked at 1,760 in 2008 when the combined market share of Asda, Sainsbury’s, Tesco and Morrisons was at its zenith. But since then, the sector’s HHI has fallen by almost a fifth amid the rise of Aldi and Lidl, and to a lesser extent Ocado (OCDO).
Of course, local experiences of competition vary, and not every shopper has the luxury of choice. Nor does the HHI score say anything about the market concentration behind the products sold by the grocers.
But given their predicament, this week’s report by the Competition and Markets Authority into the sector’s apparent padding of fuel prices shouldn’t come as a shock. Although it seems more than coincidental that margin expansion has been pursued most aggressively at Asda and Morrisons – both of which have in recent years come under highly leveraged private ownership – one could also argue that the sector has used wider forecourt margins to subsidise inflation-ravaged shopping baskets. Ditto Tesco and Sainsbury’s banking arms.
Mind you, the fuel story is almost beside the point in the context of the sector's main business line. UK shoppers’ hunger for cheap food, though not without plenty of negative externalities, has driven enormous efficiencies and logistical know-how within the sector. But in the service of low prices at the till, the grocers look destined to put shareholders second.
