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Aldi shows supermarkets’ woe not over yet

Ed Monk

Ed Monk - Fidelity Personal Investing

Investors in the country’s largest supermarkets may well have shuddered looking at the Christmas trading figures from German discount chain Aldi this morning.

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Tesco, Sainsbury’s, Asda and Morrisons have been fending off Aldi and fellow discount grocer Lidl for years but the signs are that the campaign is far from over. Aldi continues to grow its share of the UK grocery market, accounting for 8% of sales in December 2019 up from 6.9% a year before that. Lidl stands at 6.1% after a similar rate of growth.

The trading numbers from Aldi this morning showed that those figures could rise even further. The chain racked up £1bn of sales over Christmas for the first time, thanks to a host of new store openings and aggressive discounting. Aldi was selling bags of Christmas dinner veg for just 15p and even unpleasant instances of Aldi turkeys reportedly going off before December 25 didn’t deter cost-conscious shoppers.

The view of market analysts today appears to be that growing sales at Aldi are likely to have come as a result of pinching customers from bigger rivals - who will report their own trading numbers to the stock market this week - rather than a general surge of extra spending by shoppers.

Aldi does not report a like-for-like sales figure, which means higher revenues could be the result of more stores being open rather than each individual store performing better, but the company did say like-for-like performance was “positive”. That’s not expected to be the case at Morrisons, with analysts at Barclays forecasting like-for-like sales down 2.5%. Sainsbury’s and Tesco like-for-likes are also expected to be lower.

Given all this grim news for the major grocers, it’s no surprise that UK supermarkets have generally been an unhappy sector in which to be invested. (Note that neither Lidl or Aldi are listed on a stock exchange). The share prices of Tesco, Sainsbury’s and Morrisons are lower today than ten years ago, giving a sense of the decline and disruption the companies have faced, but there have been periods of optimism.

Tesco - still the nation’s largest grocer with a 27.3% market share - would appear to represent the best hope for a supermarket renaissance. Last year Tesco managed to outpace the FTSE 100 with a 25% gain in its share price.

Under the stewardship of Dave Lewis, the company says it has now met most of its targets in a turnaround plan set in place in 2014, with the remainder set to be achieved this year. Shareholders were last year rewarded with a rise in the annual dividend.

And after a series of missteps, Tesco’s expansion plans appear to be paying off. Bookers, the wholesaler acquired last year for £4bn, is now adding to the bottom line and Jack’s - Tesco’s discount store spin-off - has now launched with eight stores. The company has said there had been a ‘strong response’ to Jack’s and more openings are in the pipeline.

There is, then, still life in the UK’s beleaguered supermarkets but we may not see a full recovery in fortunes until the scale of the discount stores’ insurgency is fully known.

Five year performance

(%) As at 3 Jan 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Tesco -20.5 37.9 2.2 -3.4 31.7

Past performance is not a reliable indicator of future returns

Source: FE, as at 3.1.20, in local currency terms with income reinvested

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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