Monday, November 17, 2014 Supermarket chiefs need to take drastic action by shutting one in five of their stores if the financial health of the mainstream grocery chains is to recover from the damage being wreaked by altered shopping habits and the onslaught of the discounters, according to analysts at Goldman Sachs. A large closure programme is the only viable solution to bring about a return to profitable growth for the UK supermarket industry, the analysts said in a report. With 56% of Tesco’s stores bigger than 40,000 sq ft, the report concludes the market leader has the biggest problem on its hands. Profits at the three listed chains, Tesco, Sainsbury’s and Morrisons, have gone into reverse as weak food sales are exacerbated by the runaway growth of Aldi and Lidl. Further pressure is coming from structural changes in the market such as the growth of online and convenience store retailing. Last week Sainsbury’s reported a first half loss of £290m as it counted the cost of pulling the plug on 40 new supermarket projects and wrote down the value of its underperforming stores. Goldman Sachs analyst Rob Joyce was gloomy about the ability of the major players to bounce back if the fight was based on price cuts alone. “We believe that any major price investments by Morrisons, Sainsbury’s or Tesco can be exceeded by the discounters,” he wrote. The unhealthy industry dynamic prompted him to predict large stores would suffer like-for-like sales declines of 3% a year until 2020, unless the big chains embrace the need for major surgery. Too much focus on profitability allowed the “discounters to get too strong”, with incumbents, until recently, reliant on pushing up prices to combat falling sales, according to the report. But even Asda, which was the first of the big four to take on the discounters with a £1bn price cuts campaign, has started to show signs of strain. Last week the Wal-Mart-owned grocer reported its biggest sales decline in eight years with like-for-like sales down 1.6% in the three months to 30 September. Asda boss Andy Clarke blamed the intensifying price war and a blizzard of discount vouchers for the deterioration: “A new reality is upon us and, although we were the first to adapt, we need to do everything to remain ahead of our traditional competitors while removing reasons for customers to go to the small discount shops.” All the major grocers have now taken a scythe to prices or sent out millions of money-off vouchers in an attempt to fend off Aldi and Lidl. Goldman Sachs recommended investors sell Tesco and Sainsbury’s shares but should buy Morrisons, arguing the Bradford-based grocer has fewer large stores on its hands than its listed rivals. The investment bank also argues that Morrisons boss Dalton Philips has taken the “most aggressive steps” to address [market] share losses by combining big price cuts with a major cost cutting drive. The picture is bleaker at Tesco, which is still reeling from the accounting scandal that exposed a £263m hole in first-half profits. “We believe structural shifts away from large stores means over-spacing and not price is its biggest problem,” said Joyce who thinks its shares have further to fall, with a price target of 155p compared with yesterday’s close of 192.7p. Similarly Sainsbury’s will struggle to reverse falling sales “as Aldi and Lidl gain increasing traction with the middle classes”, said Joyce, who predicts its shares could also fall to 155p over the next 12 months, a decline of more than 40% from its current 265.7p. Last week Sainsbury’s new chief executive Mike Coupe set out his strategy for the retailer which only recently started to founder. He outlined £150m of price cuts, a cost cutting drive as well as a plan to lease under-used space to other retailers. The retailer also halved its capital spending plans and told shareholders to brace themselves for a cut in its final dividend payment.
Posted on: Tue, 18 Nov 2014 05:38:12 +0000
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