FTSE 350 Review: Supermarkets try to weather the storm

We rate Tesco (TSCO) as the strongest of the listed players, in part because of its strong free cash flow and ability to retain market share. On the latter, its strategy of offering bigger discounts to Clubcard customers has paid off. According to a Which? survey last month, the supermarket’s prices are the third-cheapest overall behind – of course – Lidl and Aldi. 

Maintaining a keen pricing strategy has obvious risks for share prices as well as margins, but Tesco has shown, at least so far, that it can woo price-conscious customers. Sainsbury’s (SBRY), by contrast, might find itself caught between two poles once again.

But there are other positive signs. We rate higher-end food retailer and department store Marks & Spencer (MKS) as a hold, and its January trading update provided further evidence that a revival in its clothing arm could help it weather the storm more effectively this year.

But the economics still aren’t working out for M&S’s online joint venture partner Ocado (OCDO). The company’s premium-priced food business continues to struggle, overshadowing its attempt to focus on its tech prospects – in November, Ocado agreed a deal with Korean retailer Lotte to provide it with warehouse and online shopping technology.

Not all of Ocado’s woes are about price. The company pointed to “an unwind of pandemic shopping behaviours” as a continued headwind last month. This remains a conundrum for other listed players, even if they are less dependent on its success. Tesco’s like-for-like online sales dropped 11 per cent in its most recent results as like-for-like overall sales dipped 0.1 per cent. Going forward, supermarkets of all price ranges will need to figure out how to pitch to customers who have less money and who are still deciding how much of their grocery shopping they want to do online.