Further Pressure On UK Supermarkets In 2016?

It’s been another tough year for Britain’s beleaguered food retail sector after the bloodbath of 2014 which saw the UK’s big four market share and share prices slide sharply as they came under increasing pressure from the new kids on the block of Aldi and Lidl.

Heading into this year optimism in 2015 was in fairly short supply that share prices would stabilise given that all three of Morrison (L:MRW), Tesco (L:TSCO) and J Sainsbury PLC (L:SBRY) would have to deal with a whole host of legacy issues, against a backdrop of shrinking margins, falling food prices and increasing competition.

The big out of town stores so preferred a few years ago have fallen foul of changing consumer shopping habits and much less brand loyalty than was the case as recently as five years ago, as the discount retailers started to eat into market share and consumer shopping habits have changed to the smaller convenience store model, and become much more price sensitive.

In 2010 Tesco appeared to have turned a cornerafter increasing its market share to 30.7%, from 30.6% at the expense of its sector peer Morrison’s who slipped to 12%, while Sainsbury’s enjoyed a nice boost rising from 16.1% to 16.4% as the big four pushed back against the rise of the discount retailers.

Looking back now that rebound five years ago turned out to be a bit of a last hurrahfor the big four as since then it’s been a slow slide down a slippery slope, with Tesco the biggest faller in terms of share price performance, while Morrison’s problems have been just as much of a slow moving train wreck, with the company dropping out of the FTSE100.

Since 2010 Morrison’s share price has lost over 44%, while Tesco has also had a much tougher time the share price collapsing from 430p, to lose over 60%, below 170p.

Sainsbury's, on the other hand, along with Asda, owned by US giant Wal-Mart (N:WMT), has managed to by and large avoid the various potholes that Tesco and Morrisonshave managed to steer themselves in to,with Sainsbury’s share only down 24% since 2010, but they have nonetheless struggled to adapt to the changing shopping habits of the UK consumer.

In fact the performance of the UK food retailers in 2014 and this year has been one of the notable stories of the last two years with sharp share price declines across the board as share prices declined to levels last seen in 2004.

With both Sainsbury’s and Tesco’s under new management in the form of Mike Coupe and Dave Lewis, 2015 was always going to be a big askwith Tesco CEO Dave Lewis under the most pressure given his brief to deal with a massive property portfolio and a significant restructuring program.

UK Supermarket Share Price Chart over 2015

Morrison’s hasn’t fared much better and in September announced a 35% fall in profitsfor the first half of the year as the company continued to see its margins come under pressure from increasing competition from the young upstarts at Aldi and Lidl. Like for like sales also showed a fall of 1.1%.

At around the same time the company announced the sale of 140 M Local convenience stores for £25m, while also announcing the closure of 11 stores, as it tries to turn around its business, and stop haemorrhaging market share.

Morrison isn't alone though as the recent numbers from Tesco and Asda have shown in recent weeks.

In the case of Tesco we've seen a similarly large slide in profits, down over 50% on the back of a similar program of store closures, price cuts and job losses, and like Morrisons like for like sales are still in decline.

Sainsbury, on the other hand has managed to diverge awayfrom this particular trend, and this is reflected in this years share price performance, while at the same time pushing back against the tide of Aldi and Lidl's aggressive discounting.

The company upgraded its profit forecast at the end of September, and only this month reported another sales increase, extending its lead over Asda, while its immediate peers reported declining sales, as Black Friday turned out to be a damp squib.

It’s not been all flowers and bouquets despite the company posting profits of £308m, above analyst estimates; they were still well below last year’s numbers of £375m. According to Kantar WorldPanel Sainsbury did see revenues rise by 1.1% in the 12 weeks to October 11, while Asda saw a fall of 3%, Tesco 1.7% and Morrisons 1.1%.

With food deflation remaining low this margin compression isn't likely to diminish anytime soonparticularly given that the supermarkets have committed to raising wages for their staff in excess of the recent living wage increases, and with Aldi and Lidl determined to up their game,next year could be equally as tough for the big four as the last two.

Tesco CEO Dave Lewis alluded to these concerns in November slamming a “lethal cocktail” of higher costs and business taxes at a time of slumping profits.

Given these factors it is hard to see how Tesco's market share won't diminish further, despite the fact it still comprises 28% of the UK grocery market. While investors obsess about this meaningless headline figure the fact remains that this downward trend will be difficult to arrest, whatever steps new CEO Dave Lewis takes in seeking to turn around the business, given how different the sector is now, from when Tesco had numbers in the region of 30%.

The UK supermarket sector has undergone significant amounts of change from a few years agowith the arrival of Aldi and Lidl, while Waitrose and the Co-op look set to increase market share as well. There is also the prospect of new potential disruptors to the sector in the form of Amazon (O:AMZN) Pantry in the on line delivery space, which means benchmarking yourself to the old model of market share is unlikely to reap dividends.

Currently Aldi, Lidl and Waitrose account for about 5% of the UK grocery market each, with the potential to grow even more given their ambitious expansion plans, and while Asda and Sainsbury are holding steady in the region of 16%, holding more or less steady from 5 years ago, Tesco has to be the most vulnerable, which suggests that we could well see this particular story continue into 2016, as the consumer finds that they have much more choice than they did 12 months ago, let alone five years ago.

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