Food retail is traditionally one of the most secure places for investors to park their cash during economic downturns. So should I consider buying Tesco (LSE:TSCO) shares for my portfolio today?
The FTSE 100 supermarket has risen almost a fifth in value since the start of 2023. But its share price has slipped 7% in the past fortnight. This is a possible dip-buying opportunity I think is worth exploring.
This means that Tesco shares now trade on a reasonable forward-looking price-to-earnings (P/E) ratio of 12.7 times. By comparison the broader FTSE index carries an average of 14.5 times.
Should you invest £1,000 in Tesco right now?
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Here’s why I would — and wouldn’t — buy Britain’s biggest retailer for my portfolio today.
The good
One of the company’s biggest weapons is its exceptional delivery operation. The size of its online business means it rakes in more e-revenues than any other grocer. It recorded an astonishing 1.1m online orders in the year to March 2023, far ahead of its nearest rival Sainsbury’s.
The division has exceptional revenues possibilities too as penetration rates in online grocery catch up with the broader e-commerce market. This is why analysts at IGD expect supermarkets’ internet revenues to soar 22.6% between 2022 and 2027, to £5bn.
Tesco continues investing heavily to exploit this huge opportunity to the fullest. Last year it opened two new urban fulfilment centres (in Cambridge and Glasgow) to meet future customer demand. It also rolled out its popular Whoosh fast delivery service to more than 1,000 stores.
The bad
But despite this opportunity the company still faces an enormous fight to grow earnings.
This is because competition is heating up in the UK grocery sector, both in-store and online. The pressure on it to continue slashing prices at the expense of profits will roll on as rivals expand. Yet this still provides no guarantee that it will maintain its market share.
Last year’s results illustrate the tough position Tesco finds itself in. Programmes like its ’Aldi Price Match’ and ‘Clubcard Prices’ schemes pulled its retail margins more than half a percent lower last year, to 3.8%. And so adjusted operating profit dropped 6.9% year on year to £2.6bn.
However, even as prices kept dropping the firm’s market share continued to erode. It dropped to 27.3% in financial 2023, down 39 basis points year on year.
The rapid expansion of budget chain Aldi and Lidl poses a particular threat looking ahead. Lidl this month announced plans to take on 1,500 more staff across its warehouses. It also put in a planning application for a new fulfilment centre in Leeds.
Changes to other grocers’ loyalty schemes also pose a threat to Tesco’s earnings. Its Clubcard money-off programme is a huge attraction to shoppers as value rises in importance. But alterations to J Sainsbury’s Nectar scheme and Morrisons’ new More Card (launched this week) threaten its effectiveness going forwards.
On balance I’m happy to avoid Tesco shares and buy other UK stocks.
