By Rupert Steiner
Christmas is the great leveler for Britain's big four
supermarket chains.
The grocery giants update on trading for a similar basket of
products, over a similar period in time, providing a perfect
snapshot for investors seeking to dodge a FTSE 100 dog or spot a
stock market star.
On Wednesday, the UK's second-largest food chain, Sainsbury's
(SBRY.LN), posted a worse-than-expected fall in Christmas sales, a
day after smaller rival Morrisons (MRW.LN) also disappointed.
Tesco (TSCO.LN), the biggest of the four, updates on Thursday
and Walmart-owned ASDA, which is merging with Sainsbury's, will
wait until next month to provide details in its quarterly
update.
It has been a tough 12-months for retailers in both food and
clothing. They have faced a cocktail of changing consumer habits,
millennials' aversion to shopping and big Brexit clouds.
Last year, privately-owned department-store group House of
Fraser collapsed into administration before being rescued. At Toys
"R" Us and electronics retailer Maplin, the shutters came down for
good.
Spending on clothing, electronics and gifts is very much
discretionary when the going gets tough. But it is a different
story for the grocers, which fare better because everyone needs to
eat.
READ:Sainsbury sales fall on weakness in nonfood unit
(http://www.marketwatch.com/story/sainsbury-sales-fall-on-weakness-in-nonfood-unit-2019-01-09)
The latest grocery market share figures from Kantar Worldpanel,
published on Tuesday for the 12 weeks to Dec. 30, 2018, show
consumers still spent an extra GBP450m on groceries compared with
the same period a year prior.
So what's behind the disappointing updates from Morrisons and
Sainsbury's?
On Tuesday, Morrisons said underlying sales for its grocery and
wholesale business, excluding fuel, rose 3.6% in the nine weeks to
Jan. 6 -- below average forecasts of 4.1% and the 5.6% sales growth
seen in the previous quarter. The shares fell as much as 4.8% at
one point yesterday.
This was despite sales at its core supermarket business rising
0.6%, which was ahead of forecasts of 0.5%.
Sainsbury's like-for-like sales, excluding fuel, fell 1.1% in
the 15 weeks to Jan. 5 -- well below the 0.2% fall forecast by
analysts. In the previous quarter, sales had risen 1%.
There was a 0.4% rise in grocery sales offset by a 2.3% fall in
general merchandise (clothing, toys and electrical goods). Around
three years ago, Sainsbury's snapped up Argos owner Home Retail
Group and has been busy cutting costs and integrating the
business.
Some analysts believe this has caused two problems -- a
distraction among management and issues with poor stock
availability. The company denies both.
READ:Tesco's new discount chain will rival Aldi, Lidl
(http://www.marketwatch.com/story/tescos-new-discount-chain-will-rival-aldi-lidl-2018-09-19)
Analysts say cost-cutting, which saw the removal of a tier of
middle managers with expertise ensuring shelves were kept
replenished, was behind availability issues.
Clive Black, an analyst at broker Shore Capital, wrote in a note
on Wednesday: "We have noticed that Sainsbury's had poor
availability and wider store standards for sometime now, and we are
not alone, in our view.
"Such a relatively weak offer is concerning to us as Sainsbury's
shoppers tend to be that little bit wealthy and arguably more
discerning about standards. Accordingly, we continue to wonder, we
may be wrong, if Sainsbury's changes to its labor process hasn't
delivered all that was desired and we worry about its absolute and
relative performance.
"We also posit that Sainsbury's may be erroneously cutting
itself to a profit outcome, albeit we know Messrs. Coupe [chief
executive] and O'Byrne [finance director] would robustly resist
such a claim."
Mike Coupe said on Wednesday: "There has been a general sort of
down trading, so people have been very, very careful in the way
that they spent their money.
"We can see that reflected in our grocery business where in
effect we saw people down trading and being more careful in the
items they bought that meant the average item price was lower than
we would have expected.
"So there is definitely caution out there, and of course as we
go through the next period of uncertainty, I suspect that will
continue to be reflected in the way that customers behave."
Morrisons has highlighted a change in consumer behavior in
November, amid uncertainty over Britain leaving the EU. CEO David
Potts said: "Going into November there was just a sense that
customers were a bit more cautious."
It has a rapidly expanding wholesale business, supplying
products to Amazon (AMZN) and McColl's Retail Group and it was
disappointment in this division, which weighed on the shares
Tuesday.
The firm has been going through a transformation program under
Potts after trouble integrating rival Safeway in 2003, which meant
it was late launching convenience stores and online. It also failed
to modernize, having outdated systems that meant, until recently,
its supermarkets had to order stock by pen and paper.
READ:UK supermarkets post record holiday sales: Kantar
(http://www.marketwatch.com/story/uk-supermarkets-post-record-holiday-sales-kantar-2019-01-08)
Over recent years all the big four grocers have had to face two
big hurdles -- changing consumer habits and competition from the
discount retailers.
While Tesco has undergone a marked recovery under CEO Dave
Lewis, its update on Thursday is likely to show it has not been
immune to these challenges.
Tesco, along with its rivals, has seen an impact from shoppers
heading to budget chains Aldi and Lidl, which offer less selection
but cheaper products.
Consultancy Kantar Worldpanel
(http://www.marketwatch.com/story/uk-supermarkets-post-record-holiday-sales-kantar-2019-01-08)
said two-thirds of all British households shopped at either Aldi or
Lidl over the 12 weeks to Dec. 30, resulting in their highest-ever
combined Christmas market share of 12.8%.
They have also hurt ASDA, which historically set itself apart on
price and little else.
Shoppers have also changed the way they buy their groceries,
replacing one weekly shop with multiple visits to smaller
convenience stores to save waste and money.
This has benefited chains such as the Co-op, which has a skew to
smaller local shops and has hurt ASDA, which mainly has larger
warehouse-style stores.
There has also been a big shift to shoppers buying groceries
online where Ocado (OCDO.LN) , which has no stores, is a strong
player.
(END) Dow Jones Newswires
January 09, 2019 08:49 ET (13:49 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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