"It's murder on the dance floor but you better not kill the groove, it's murder on the dance floor, but you better not steal the moves."
This song by Sophie Ellis Bextor is an apt metaphor to describe the underperformance of the big four supermarkets in 2014, though it's been more a case of murder on the shop floor as all four big retailers have had their profits cut to the bone in the last few months, as the small discounters of Aldi and Lidl have well and truly stolen their moves.
To be honest, the warning signs had been there in the lead-up to this year with both Morrisons and Tesco enduring a run that ideally both would like to forget. Since 2010 Morrisons share price has lost over 34%, while Tesco has also had a rather rough time of it as well, the share price falling over 55%, with over 40% of that this year alone, and this month’s kitchen sinking of this year’s profits indicative of further potential struggles ahead.
The sheer size of Tesco’s retail operation is likely to mean that we could well see large scale write downs to the company’s property portfolio in the coming months, while the next phase of the turnaround plan due to be announced on January 8th could well be a harbinger of further investor angst particularly if Christmas sales figures disappoint as well.
On the other hand Sainsbury's, along with Asda, owned by US giant Wal-Mart, had until the beginning of this year managed to steer clear of the various potholes that Tesco and Morrisons appeared to have fallen into.
This divergence ended for Sainsbury's in the last couple of months of 2013 when the share price went into sharp reverse from peaks above 420p to almost halve in value to trade at 11 year lows in October this year.
Throw Ocado, the on-line supermarket, into the mix and its luck also ran out this year, having seen its share price rise from lows of 57p in 2012 to peak at 623p in February this year, despite never having made a profit, before investors finally woke up to the vulnerability of this particular business model as well.
In fact the performance of the UK food retailers this year has been one of the notable headline grabbing stories of the year with sharp share price declines across the board.
As can be seen from the chart above, when you strip out Wal-Mart and Marks and Spencer from the mix, not unreasonable given their multi-channel offering, shareholders in the major food retailers have endured a pretty torrid time.
It’s not hard to see why the damage has been done when you look at the inroads the discount supermarkets have made into the main supermarkets market share. The big four appear to have been caught out by a significant change in consumer shopping habits as shoppers have become more price sensitive in an age of squeezed incomes.
The big out of town stores have become less fashionable as consumers have turned to more town centre convenience stores for their food needs, as well as becoming less snobby about buying non-branded goods.
The shift in sentiment has occurred at both ends of the price scale with Waitrose also gaining market share, catering as they do, to the slightly higher end of the price scale. Their market share has grown this year by 6.8%, as the big four get squeezed from above and below in equal measure.
Over the last twelve months Aldi has seen its sales market share increase 27%, followed closely by Lidl who has seen its sales market share increase by 18%, and with pound shops also gaining in popularity it seems likely that the big four supermarkets could well find 2015, just as challenging as 2014 has been.
It also begs the question as to whether we’ve seen the worst of the price falls, given that it seems likely that the big four will have to continue to maintain the downward pressures on prices, in order to maintain their current market share, which in turn will cap margins.
As things stand Tesco’s market share currently stands at 29%, while Asda and Sainsbury are more or less equal on 17% and 16% respectively, with Morrisons fighting a rear guard action at 11%.
One thing is certain; even though Aldi and Lidl combined only account for just under 10% of the UK grocery market, their plans are ambitious, with Aldi planning to open another 60 stores in 2015, in complete contrast to Sainsbury’s who have called a halt to their expansion plans.
They may well, as Goldman Sachs suggested in a note earlier this month, have to close some of their bigger stores, if as Sainsbury’s new CEO Mike Coupe appeared to suggest in comments earlier this month, that the industry was facing a “once in a generation combination of cyclical and structural change”.
This, he suggested, in a what could be argued as a classic case of getting your excuses in early, would mean that like for like sales in the supermarket sector would be negative for the next few years, amongst the larger stores as shareholders adapt to a new normal, though his comments did appear to find some support from Waitrose CEO Mark Price who acknowledged the industry was facing its biggest upheaval since the 1950’s.
This realisation by the big four could well see further consolidation in the coming months, with the prospect of further pressure on dividends, particularly if margins continue to remain under pressure, which seems likely.
The likelihood is that UK consumers will remain value conscious and as such margins look set to get squeezed further, which means that shop prices could well fall further, great news for consumers, not so much for the supermarkets.
It seems the Tesco’s motto “every little helps” is starting to ring a bit hollow, particularly now that it’s been hijacked to “every Lidl helps”.
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