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.

As I sat sipping a coffee at my local café yesterday, a nearby couple’s conversation about the different online food delivery services caught my attention.

It’s a subject that’s been rising in prominence among British consumers, with many using online delivery for the first time this year. And while the women next to me reached little agreement over which online platform was best, one area of consensus was clear - neither would be rushing back to the supermarket aisles any time soon.

Supermarkets see super sales

Supermarkets have been one of the clear beneficiaries of the pandemic, but underlying their success has been a shift in the manner in which many of us use them and what services we expect them to perform.

At the beginning of lockdown, their shelves became emblems of consumer chaos as anxious shoppers looked to stock up on toilet roll and hand lotion, while supply lines struggled to meet the sudden surge in demand.

Shoppers spent an extra £1.9 billion in just four weeks up to 22 March, with sales up 20.6% during that period, and stores have carried much of that momentum into the remainder of 2020. Consumer trends company Kantar found that take-home grocery sales rose by 10.8% during the 12 weeks to 6 September 2020, having achieved a record £31.6 billion over the 12 weeks prior.

How exactly the pattern will play out over the remainder of 2020 and life post-pandemic is hard to say. But an uptick in online sales, which rose by 77% year on year in the past four weeks, looks set to become a lasting legacy of the pandemic. Online sales peaked this year at 13.5% of all total sales, and despite falling back to 12.5% in August, that’s still a significant rise on levels of around 7% pre-COVID.

It’s reassuring too to note that, while prices this year have generally soared as earnings have stagnated, the supermarkets’ forward valuations remain reasonable. Sainsbury’s forward price to earnings ratio (P/E) of 10x and Tesco’s 13x, for example, compare favourably to those of other sectors that have performed well over the pandemic, as do healthy dividend yields of 5.5% and 4.2% respectively. Please note these yields are not guaranteed.

A changed landscape

How different supermarkets have responded to the shift in consumer behaviour has been a major differentiator between their performance levels this year. Online group Ocado has seen its share price soar over 2020, so much so that in September it took Tesco’s place as the UK’s most valuable food retailer.

The stock has seen a 630% price rise since the start of 2018 - that’s more than Tesla or Netflix. Please remember past performance is not a reliable indicator of future returns. Returns like those make Ocado look like a technology stock, and its business model means it operates like one too. Their customer fulfilment centres incorporate gaming technology to visualise warehouses in 3D, and their work in robotic order fulfilment is a sight to behold - have a look online. This technological edge meant Ocado was well-equipped to respond to the initial upsurge in demand, where others lagged behind.

A long-agreed partnership with Ocado, then, looks to have come at a good time for M&S, whose traditional model was starting to show its age. Ocado reported initial signs of shoppers happily filling their online baskets with more M&S products on average than Waitrose ones prior to the switchover.

Waitrose, whose 18-year partnership with Ocado ended last month, also appears to have prepared well for such behavioural shifts - its online offering,, experienced the fastest year-on-year online growth of any retailer over the 12 weeks to 6 September.

Nor did it take long for the ‘traditional’ supermarkets to catch up. Tesco has more than doubled its delivery capacity to 1.5 million slots a week, while Sainsbury’s is also looking to double its capacity to 700,000 slots a week by the end of October. Sales rose for all the ‘big four’ - Tesco, Sainsbury’s, Asda and Morrisons - during the 12 weeks to 6 September.

The challenge of delivering food direct to customers’ doors has posed greater problems for German discounters Lidl and Aldi. While both have made efforts in this direction - Aldi has teamed up with delivery service Deliveroo and Lidl is trialling a click-and-collect service abroad - both view a fully-fledged online offering as incompatible with their low-cost business model.

Concerned shoppers have also stayed clear of their smaller, more densely packed stores in favour of the wider aisles on offer at the traditional supermarkets. That’s left Lidl and Aldi hit on both fronts since the pandemic struck.

While their fortunes had been relentlessly positive since the last recession, which saw shoppers flock to their cut-price shelves, the pendulum has now swung back in favour of the traditional UK retailers, with sales at both Tesco and Sainsbury’s in May increasing at a faster rate than Aldi’s for the first time in a decade (though Lidl’s continued to outstrip both).

2020’s recession has been very different from 2008’s, and even though the full effects of the pandemic on UK employment are yet to be felt, the traditional supermarkets are in a better place to retain customers this time around. Price differences between them and the discounters are lower now than they were in 2008, and Tesco is offering to price-match Aldi on hundreds of Tesco and branded products.

The supermarket soap-opera, then, has been full of twists and turns in 2020. Clear winners and losers have emerged amid a consumer landscape that appears to have changed for good. Knowing where to invest in the sector will rest largely on deciding which companies are best prepared for life after the pandemic.


Price Earnings (P/E): A valuation ratio of a company's current share price compared to its per-share earnings.

Five year performance

(%) As at 16 Oct  2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Ocado -23.8 18.3 176.9 62.1 82.2

Past performance is not a reliable indicator of future returns

Source: FE, total returns as at 16.10.20, in local currency

Important information: 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. When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Investors should note that the views expressed may no longer be current and may have already been acted upon. 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.

Topics covered

Shares; UK

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