Supermarkets - shoppers are the main winners

Supermarkets: So, we have now had trading statements from Sainsbury’s and Tesco, covering the Christmas period. Amidst the depressing stats about how many mince pies obese Britain ate, has anything much changed? Well, clutching at straws, it seems to be getting worse slower as negative LFL’s ease. However, more and more I am seeing comment that LFLs may be a red herring (probably also soon to be reduced in price) as their use is devalued by the noise created by on-line sales and click and collect services. The bad news is that there is still deflation in the system and the simple old sales line is still heading in the wrong direction. This seems to be particularly so in core food sales in store, with the blow being softened by non-food sales. The problems of over-spacing will take years to unwind, with Tesco being especially bloated.

At the same time, whilst the sales line flounders, the margin issue is getting worse. I read today that Sainsbury after its headline price cuts is now cheaper than Tesco on a ‘typical basket’ of shopping. Well I can’t see Tesco putting up with that, with the natural order likely to be restored after its latest salvo of price cuts announced today. Not that any of this will make Lidl and Aldi quake in their boots, implying that more needs to be done before equilibrium with the discounters is established. Tesco’s move is backed by cost saving measures (including moving from Cheshunt to Welwyn Garden City but leaving many ‘colleagues’ behind with a remaindered UB40 download). Tesco can at least also hack bits off with Blinkbox going to TalkTalk and Dunnhumby on the block, but these are not a solution to the core issue. They are one-offs that will not in themselves restore profit margins. Another Tesco cost saving is waving goodbye to the final dividend this year, with the bigger temptation of an equity issue still there.

Obviously there are broker forecasts aplenty out there, but these are fluid and could well have further to fall. With returns on capital looking sparse, balance sheets puce, sales down and margins falling, the outlook for dividends (let alone growth thereof) is glum. So, for income investors, it is still too early to wade back into the melee. For years we worried about what damage a full scale price war would do to the industry and now we are finding out. (Neil Cumming^, 8^th January 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower