The UK supermarket industry is competitive and has been dominated by big names such as Tesco and Sainsbury’s. These well-established names have a strong track record, and despite the challenges faced in recent years, they make attractive investment opportunities.
Tesco (TSCO) – In The Lead
It’s difficult to discuss the UK supermarket industry without mentioning Tesco. They hold the largest market share across the market and have held the top spot for decades. The market has faced soaring inflationary pressures over the past year, but Tesco has navigated these issues well. Its Clubcard has kept consumers loyal, with strong rewards keeping customers satisfied.
The firm has also invested heavily in its online position. TSCO’s online sales and online deliveries market share have both grown, with the company managing to maintain a fair portion of its online traffic which boomed during the pandemic.
The risk Tesco faces is stubborn inflation causing consumers to switch to budget retailers, such as Aldi and Lidl. However, as mentioned, Tesco’s loyalty schemes have served the supermarket well. In addition, consumers switching to TSCO’s own-brand products helps the company control margins and negotiate with suppliers.
Sainsbury’s (SBRY) – Looking For Value?
Sainsbury’s strong initiatives towards price and value have been favourable for the firm. The company has responded well to the inflationary pressures faced by shoppers, with its Nectar price promotions open to loyalty members. The supermarket also increased the number of products covered by the Aldi price match guarantee, all of which will hope to boost sales during a challenging economic period.
This already resulted in grocery sales soaring 11% in Q1 and total retail sales jumping 9.2%. With Argos’ focus on value and convenience, Sainsbury’s may be well-positioned moving forward.
According to Which.co.uk, Aldi and Lidl took the top spots for average basket price, with Sainsbury’s ranking 5th.
Marks & Spencer (MKS) – Reputation Holding Strong
Marks & Spencer shares have made significant gains this year as its growth plans have proved effective. Its results for FY22/23 saw revenue grow 9.6%, with a successful performance across its food segment. Its recent trading update has also fuelled further positivity.
M&S has sharpened prices across everyday lines, but investment in its premium position will also help consumers trade up. Despite some of their higher price points, M&S’ product range and quality have helped make them extremely attractive among shoppers.
However, its operating profit fell 11.6% in the same period, and a poor performance from its Ocado arm suggests retaining its online shoppers has been challenging.
B&M (BME) – Special Mention
Although not typically a supermarket, I had to offer a special mention to discounter B&M. The general merchandise retailer has continued to excel across all its fascias as consumers hunt for bargains amid the cost-of-living crisis.
Total revenue increased 13.5% in its Q1 results, with an 11.3% increase in its UK arm. The group has continued to expand its store presence as it advanced towards its long-term target of 950 UK stores.
Despite inflation beginning to ease, higher mortgage rates and negative real wage growth will likely keep consumers purchasing from discounters such as B&M. Therefore, despite an almost 30% rise in B&M shares in 2023, there is still further opportunity for growth as it continues to build its range and grow its grocery offer.
Reasons to Buy UK Supermarket Stocks
While the names above could provide some attractive opportunities for investors, it’s also important to evaluate why investing in this market can be beneficial.
- Long-term structure – Supermarkets are less susceptible to economic downturns due to the necessity of the goods they sell. Consumers will always be in demand for supermarket goods, which provides stability during difficult economic conditions.
- Competition – The industry, especially in the UK, is dominated by a few major firms such as Tesco, Sainsbury’s, and Asda. Therefore, competition is somewhat limited, with names such as Tesco and Sainsbury’s holding a strong position across the market.
- Online – The online grocery market is growing, and this is offering a new opportunity for supermarkets. Growing their online sales offers another avenue to improve their performance and build their customer base.
By Jamel Boughedda