Food Retailers Feel the Aldi/Lidl Squeeze

Ahead of Sainsbury’s full year results, Michael Hewson takes a critical look at its performance and how the new kids on the block Aldi and Lidl are affecting the big supermarkets market share.

Within the report Michael discusses:
• How the performance from supermarket contenders Aldi and Lidl are affecting Sainsbury’s, Morrisons and Tesco
• Morrison’s profit warning and decline in share price
• Whether Aldi and Lidl could replace one of the big four

If Sainsbury’s outgoing CEO Justin King were looking at an exit strategy he really couldn’t have timed it much worse. Having turned the supermarket chain around over the last few years, he is now leaving at a time when his managerial skills are probably likely to be most needed, particularly if last week’s share price declines are indicative of the challenges ahead.

Sector peer Morrisons profits warning last week pulled the rug from under the sector as it strives to take on the budget retailers Aldi and Lidl, and in the process slash their margins to the bone to arrest a sharp slide in sales.

Even Tesco last week gave up on sticking to a benchmark profit margin.

It would be all too easy to bracket Sainsbury in the same block with Morrisons and Tesco, but there is the potential for Britain’s number three supermarket to weather the competition from Aldi and Lidl better than its rivals.

For a start it is in much better shape than its other two rivals who bookend the supermarket sector, Tesco at number one, but on the slide and Morrison’s at number four, while at its last trading update in January, Sainsbury was the only supermarket to hang onto its market share, though its profit margin was already lower than Tesco and Morrisons and that could be a worry if they feel compelled to follow suit in implementing heavy discounting to compete.

While the decline in Morrison’s share price is more understandable given that it is playing catch-up with respect to its on-line presence, its decision to bring in a loyalty card is much less understandable given these cards are ten a penny. Tesco’s have Clubcard and their market share is declining while Sainsbury don’t have one and appears to be holding on to its share, though you can collect nectar points.

Morrisons also announced it would be selling off £1bn worth of property assets as well dispensing with its stake in US online grocer Fresh Direct, as it looks to become a “value leader” and take the fight to the young upstarts from Germany. The key question is will it be enough given that the shares are at 6 year lows and the fact that the super market chain is playing catch up from a long way back.

This week’s results could well give important clues as to how Sainsbury’s will perform going forwards after Justin King has gone, and whether it has the ability to take on the competition from the low cost budget retailers, while at the same time maintaining market share, at the bottom end as well as the higher end.

While there is no question that the emergence of Aldi and Lidl has shaken up the status quo with respect to the food retail sector, it may be overstating it to claim that they could replace the big four supermarkets in terms of market share, given the current limited nature of their product ranges.

Of all the four major supermarkets Sainsbury’s is probably best equipped to handle this threat given it has managed to not only close the gap on Tesco in the past few years, but has also been well managed under Justin King’s tenure.

Last week’s falls have seen the share price trade below its lows of last year and further declines could well bring it back to levels last seen in June 2012, but it would be a surprise to see it fall much further.