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There is something noticeably unusual happening with UK supermarkets – a phenomenon not seen for years. All major supermarkets quoted in London namely Sainsbury, Tesco and Morrison are down sharply this year. Sainsbury’s decline started in November 2013, Tesco’s decline started in April 2013 and Morrison’s decline started in January 2012. Morrison is the worst performer and while the general market (FTSE 100) has been going up UK supermarkets are diverging from this trend by going down.
It’s the same story we are hearing more and more about lately – lower retails sales resulting from struggling household budgets. But the worrying thing is that this is happening at a time when the economy is doing well, jobs are being created and consumers appear to have more money to spend. So why are consumers not they spending more on their groceries?
Some customers have switched to the lower-end discounters who with clever pricing models have stolen some of the big-four’s market share. But this begs the real question – why are people spending less in a period when the economy is doing well? Reading between the lines I suspect there is a mounting problem that consumers have to deal with — DEBT!
The BBC reported “Household debt in the UK has reached a record level, according to figures from the Bank of England. Individuals now owe a total of £1.43 trillion, including mortgage debt, slightly above the previous high set in September 2008”. It’s a scenario reminiscent of the credit crunch days, where belts are being tightened as people fail to make ends meet. If supermarkets lose their reputation as being good-quality defensive stock picks another crisis could be a catalyst to disaster for the sector. Supermarkets stand to plummet much faster than the rest of the stock market if people are spending less and competition remains fierce.
I would advise long term investors to have some form of short exposure to the supermarket sector as the imminent bursting of the massive debt bubble materialises. Short term investors can profit from falling as well as rising prices. Indeed I think the sector will bounce in the short term then we can look forward to the next leg down. Resistance levels to watch are 350p for Sainsbury, 230p for Morrison and 320p for Tesco.
Thierry Laduguie is FTSE 100 Trading Strategist at www.e-yield.com
