vegetables_pixabay_large

8 Important Calculations/Factors before you invest in the Grocery Sector

To analyse the individual players in the grocery sector, you need information telling you the right time to invest and time to sell your holdings.

From my experience, these calculations and factors would help save you a lot of trouble and MONEY because it will give the answer in whether business sales and profits are sustainable.

Some of this information would inform an investor the unsustainable nature of a company’s operational status and question the company’s business model.

 

These 8 important factors should expose these risks and tell if there is an investment opportunity.

Let’s start!

 

  1. Market Share is your Most Important Data

Forget about Sales, Like-4-Like Sales growth or Corporate Earnings, and your attention should focus on MARKET SHARE.

Because it helps determine the direction of the company’s share price

 

Here is Sainsbury’s market share vs. mkt. cap. (£m):

relation mkt share and cap

Without knowing anything about Sainsbury’s activities (ignoring the headline events in the past twenty years), you can see the steadily declining and stagnant market share graph leading to a lower market value for Sainsbury.

Tesco didn’t escape this fate, either (more…)

Share This
Facebooktwittergoogle_plusredditlinkedintumblrmail
download

5 Reasons Tesco is losing its Grip in the Grocery hierarchy

INTRO

In the past five years, Tesco and its shareholders are having trouble adjusting to the new environment of supermarket shopping.

 

Ever since the great recession, this new shopping require the consumer to shop around and not rely on big weekly shopping trip, which is Tesco’s strengths.

According to IGD, grocery shopping in hypermarkets and superstores is expected to fall from £73.7bn in 2014 to £70.8bn in five years’ time.

And this sudden change coupled with innovative ideas has helped smaller stores like Waitrose and two German discounters, Aldi and Lidl to take advantage of this new shopping pattern.

 

So, how will Tesco response to the encroachment of its territory and the changing shopping habits of the UK consumers?

To answer that question, you need to know where the “battle lines” are drawn and the signs of Tesco’s decline.

 

 

PRICE WAR – A win for the consumer

No business wants to enter a price war.

A study of more than 60,000 grocery items of Britain’s “BIG 4” grocers saw average prices fell by 2.8% in the year to February 2016.

Morrison saw the biggest drop at an average of 5.2%. Next, it was Tesco at 3.4%; Sainsbury was down by 2.2% and Asda recorded a 1.4% drop.

Despite these price cuts, Aldi is still the cheapest (Lidl wasn’t surveyed, but believed to be similar), according to The Grocer.

Supermarket Price
Aldi £40.28
Asda £50.96
Morrisons £52.06
Tesco £53.90
Sainsbury’s £57.95
Waitrose £61.64

Source: The Grocer and home.bt.com.

N.B.: The basket contains staples goods including bread, teabags, eggs, apples, pasta, grapes, and cornflakes.

With Aldi still the cheapest by more than £10 than its closet rivals, the supermarket price war is likely to continue, which makes the customer the overall winner!

Own-brands – an opportunity missed by Tesco

 

Own-brands label make-up 54% of total UK supermarket sales according to Nielsen. And the best place to buy own-brand items is in Waitrose, according to Which? (It tested 160 products).

Disappointedly, Tesco and Asda was bottom in this year-long survey, here are the results:

 

BEST BUY LEAGUE OF 2015 

  1. Waitrose 47%
  2. Aldi 40%
  3. Sainsbury’s 37%
  4. Lidl 36%
  5. Co-op 31%
  6. Morrisons 20%
  7. Asda 5%
  8. Tesco 5%

% score shows number of products tested given a best buy rating.

 

No surprise that Tesco hasn’t developed its “own-label” brands to keep pace with the competition.

 

That is an area Tesco needed to apply itself because having strong brand products will differentiate it from the competition.

 

Falling Market Share – not good news for Tesco’s shareholders

The strong sales growth of Lidl and Aldi has helped it to grab market share from the traditional “BIG 4” supermarket chains.

Waitrose also made progress, but its market share has been stagnant for 3 years.

When it comes to investing in the grocery business, an increase in market share is a sure way of appreciating a company’s market value (share price).

 

For example, Tesco’s market value and its share price has appreciated in value because it was winning the supermarket war.

tesco market share relations

But, when they were losing the supermarket war on 2010 onwards from the discounters, Tesco saw its share price fell by more than 60%.

When Sainsbury was in Tesco’s position back in the 90s and 00s, its market value has gone no way in the past twenty years!

 

sainsbury saw market cap go nowhere

As seen from the chart above, Sainsbury declining market share suffer the same fate as Tesco, a fall in market value.

 

Let’s us measure a grocer’s market capitalisation and market share on a “like-for-like” basis.

You would say today Tesco’s market value of £13bn represents 28.3% of market share. Back in 2004, Tesco has a lower market share of 28% but a higher market capitalisation at £20bn.

So, why do these disparities exist?

Well, some factors unsettled investors like accounting irregularities, massive write-downs on its property portfolio, high debt and pension obligations.

Or, Tesco is simply on a declining trend.

 

Whereas back in 2004, Tesco was popular, if not over dominating the sector as it got the benefit of the doubt from the investment community.

 

 

UK Food Inflation

Consumers hate inflation and don’t like to pay more for essential goods and services.

On the reverse side, supermarkets love inflation because they can achieve higher profit margins.

Below is a chart measuring the monthly changes to UK Food Inflation.

united-kingdom-food-inflation

And, consumers are currently enjoying lower food prices, in fact, prices have not been this low and this longer since the 1990s.

 

The current food price deflation began in early 2014.

united-kingdom-food-inflation shorter period

That is due to a number of factors ranging from price cuts to lower oil prices.

The main culprit is the two discounters’ of Aldi and Lidl.

Ever since they became a popular place to shop, the “BIG 4” which controlled 65% of the UK grocery market began cutting prices to tempt back customers.

Given its dominating size and position, their actions dragged food prices lower; however, the discounters are still 20% cheaper than the “BIG 4.” (Read “PRICE WAR – A win for the consumer.”)

 

 

 

Tesco’s choice is losing appeal to “No frills” shopping experience

Have you ever became confuse from choosing 50 brands of pasta or have been spending too much time in a supermarket?

Then, why not shop at Aldi and Lidl.

And that is what food shoppers are doing,

It means less variety = less confusing = time saved!

 

The phrase “give customers what they want” do not apply to food anymore.

And it what gives Aldi and Lidl the edge in this supermarket “marathon contest.”

Another is assessing the number of products against revenue to come up with average revenue per product: –

Grocer No. of products Sales Revenue/product
Sainsbury 30,000 £25.8bn £860,000
Tesco 90,000 (2015) £54.4bn £604,444
Aldi 1,400 £6.89bn £4,921,429

 

Concentrating on products that sells would lower costs of marketing and helps to streamline the business.

Also, Aldi contributes to making customers less confusing on which tomato ketchup to buy or what’s the best air fresher to choose from.

The data table proves having fewer product lines do not necessary mean a smaller business.

And, finally

 

Tesco (was) a dominating force in the UK

Sometimes having experience success for so long can make you complacent. Tesco dominances in the UK were one of the longest reigns.

The company stranglehold is so dominating that it controls 31.3% of the UK grocery market at its peak in 2007 (now, down to 28.2%) from a respectable 7.2% back in 1971 (as far as data history goes).

 

Such dominance means Tesco need to venture overseas for growth leading it to operate in 14 countries by 2010.

And management focus dipped slightly in its UK market, or just enough for competitors to grab back market share.

Also, the rush to conquer the U.S. was a mistake because it is home to some of the largest grocers in the world, including the biggest Wal-Mart.

 

 

Back to the drawing board for Tesco

What can Tesco do to improve its business going forward?

Tesco is moving in the right direction by getting rid of all its “non-core” businesses (gimmicks) like Giraffe restaurant and the failed “Fresh & Easy” brand in the U.S.

 

The closing large stores and reducing opening hours to cut costs is another step to increase efficiency.

Tesco’s top priority would be to win back its customers, and that would require time and effort. This includes:

  1. Areas of improvement would be streamlining its product lines with the focus on what products sell and discard those that are loss-making.
  2. It has a lot of work to do in re-developing its “own-label” products if successful customers would be tempted back because you can buy it from Tesco not anywhere else.

Unlike a six-pack of Coca-Cola!

 

Until these two things happen, Tesco would continue to see falling sales and market share. And that is a given fact!

Share This
Facebooktwittergoogle_plusredditlinkedintumblrmail