It is striking how candid managements can be when they do not have to dance to the stock market’s tune. In a blunt assessment of the outlook, the privately-owned Morrisons said this week: “We believe that developments in the geopolitical environment since the beginning of February, as well as ongoing and increasing inflationary pressure, are impacting consumer sentiment and spending, which we expect to adversely impact the wider grocery market.”
For many years, supermarkets outperformed the economy as a whole by sucking in business that had gone to independent grocers and corner shops. But that trend has long been exhausted, exposing the sector to the full force of any downturn.
From investors’ point of view, supermarkets are two businesses in one. They attract customers with well priced and decent quality essentials, but then hope people will top up their baskets with higher-margin treats, from booze to sweets.
Sales of essentials, never mind the treats, have been put under severe threat by inflation, supply chain problems and the Ukraine conflict.
The three main publicly-traded supermarkets are J Sainsbury, Tesco and Ocado. They each offer a different angle on the current environment, particularly Ocado, as it is dedicated to delivery. While Morrisons is mainly northern, the other three tend to graze in the richer pastures of London and the southeast. But they will not entirely escape the looming rain clouds.
Clive Black, an analyst at Shore Capital, said Morrisons’ warning “dampened the overall mood music” for the sector: “Goldilocks inflation has disappeared and something less manageable for the majority of households is now in place.”
NielsenIQ, the data harvester, says grocery sales fell 4.1 per cent in the four weeks to March 26, the sector’s lowest growth this year, though set against a strong recovery a year ago.
Online sales fell 19 per cent while high street stores shed only 0.6 per cent. Store visits rose by 5 per cent over the past four weeks, and spend per visit or delivery across all channels averaged £18.52 in March, virtually unchanged from February.
Tesco sales were down 3.5 per cent, Sainsbury minus 5.8 per cent, while Ocado held steady. Some pain is passed onto food and drink makers as customers switch to cheaper own-label versions of their favourites.
Mike Watkins, NielsenIQ’s UK head of retailer and business insight, said: “We are beginning to see three trends: more spending on private label products, an increase in trading down and a shift to retailers that are perceived to offer value for money. This will not only be discounters like Aldi or Lidl, but any supermarket with a strong price message.”
Aldi and Lidl were taking market share, even before the crisis. If that continues and a price war breaks out, Tesco’s decision to close its Jack’s discount chain in January may go down as one of the worst-timed moves of the year. We will hear more from Tesco next week. Sainsbury is due to report on April 28.
Investors have an understandably grim view of the sector. Tesco shares said goodbye to 300p as the first Russian troops marched into Ukraine in February. Sainsbury had started tumbling in January, also from 300p. In both cases they trade on modest p/e ratios. But this may be a case of buying while the guns are firing. They can after all pull out playbooks from past crises, although competition will be fierce.
Ocado has been trending down from £21 for the past six months, and now languishes at £12.23. Last month’s trading update was poorly received, knocking the shares by 8 per cent to £10 on the day amid a reduced sales forecast. That can only have been adjusted one way since, and the p/e ratio is still high.
Advice Hold J Sainsbury and Tesco and avoid Ocado
Why The first two have experience of trading through tough times, Ocado less so
The Moonpig staff have just survived their trickiest time of the year, when their personalised greetings card service is subjected to Valentine’s Day compositions that can be, shall we say, frank in their effusiveness.
The company pleased the market with an upbeat trading update yesterday, which is just as well. It has created a club of disgruntled investors who subscribed for the shares when they floated at 350p just over a year ago, and soared to a highly optimistic 488p last June. They are now at about 237p, after sinking to 203p.
Despite constantly bullish noises from Nickyl Raithatha, chief executive, the company is in a tough market and facing even more headwinds than the supermarkets. We have to eat — we do not have to spend money on greetings cards.
In that light, his talk of a “permanent uplift” in activity, with a larger customer base displaying higher loyalty than pre-pandemic, sounds worryingly like whistling in the wind. It is hard to call anything permanent at the moment, least of all our propensity to celebrate.
It is heartening that Moonpig trading has held up, supporting expectations of £300 million revenue for the year ending this month, a £15 million upward revision on the back of last winter’s lockdowns.
Wisely, Raithatha is working on the basis of a relapse to £265 million for the year beginning on May 1. In those terms, it is worth bearing in mind that sales in the previous year, which was even more Covid-ridden, were £368 million.
Peel Hunt welcomed the update, saying that Moonpig is defying the headwinds. Why? “Because it’s a very good company with a near-unique proposition.” But that proposition can be replicated by competitors.
Raithatha wants the company to become “the ultimate gifting companion”. That is some way off, to put it mildly, but it indicates where Moonpig could be heading. It has to widen the product range.
Exponent, the private equity firm, has a 16.9 per cent stake, which may be the first port of call for an intending takeover bidder.
David Reynolds, of Davy Research, sees the p/e ratio falling from 24.3 to 17.9 in the next two years.
Advice Hold
Why The shares have reached a more realistic price
