Business

Where are the supermarket chains in terms of market value?

DROP: Three of the big four supermarkets have seen their share prices fall
DROP: Three of the big four supermarkets have seen their share prices fall DROP: Three of the big four supermarkets have seen their share prices fall

Tesco’s abrupt fall from grace last year caused shock waves to reverberate round the market. The increased intensity of competition from the discounters was certainly well acknowledged, but the advent of accounting irregularities in such a major company was greeted with utter dismay and the share price reacted accordingly.

Since then Tesco has seen a new chief executive take the reins and indeed other major management changes have also taken place. The share price has recovered a little from its nadir, but is still languishing a long way below levels seen 12 months ago.

The three supermarkets have all seen a fall in their share prices over the past year: Tesco is down 26.3 per cent, Sainsbury is down 20.1 per cent and William Morrison is down 7.7 per cent.

To put this in context, the FTSE 100 is virtually unchanged over the same period (it is actually up 0.1 per cent).

All three have revealed a continuation in falling sales for the first quarter of 2015 and as yet there appears to be no let-up.

The meteoric rise of the discounters, Aldi and Lidl is well known with their ruthless price cuts attracting a whole new range of customers. The decline of the traditional supermarkets has been blamed on them and indeed there is little doubt that this is a major factor, but it may not be the whole story.

The economic downturn did put pressure on household budgets and encouraged shoppers to seek out better value on individual items, rather than the “old” habit of everything under one roof.

The traditional weekly shop is certainly in decline and there has been a sharp increase in on-line grocery shopping. Another change has been the recent fall in food wastage. What would have been unthinkable for the last generation was only too evident prior to the financial crisis: it is estimated that one third of food purchased was thrown away in 2007 (8.3 tonnes a year, worth £15.8 billion in today’s prices).

Only five years later in 2012 this wastage was down by 15 per cent - still a horrifying level, but a major shift. While some would argue that such habits are cyclical and this may be reversed as we feel better off, it could also be argued that it is a structural change.

Where does this leave the big traditional supermarkets in terms of value in the market today? They do not look expensive when using historic measures, but given the current environment of falling sales and therefore earnings, these are probably not the best measures to use.

All three have seen major management changes at the top and while they may appear to offer attractive dividends (Sainsbury has a yield of over 5 per cent and Morrisons of over 7 per cent) there are no guarantees that they will not be subject to reductions in the future.

It is without a doubt a very difficult environment and it is not easy for such large companies to react swiftly, therefore it would take a brave investor to dip a toe in the water at this point.

  •  Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, which is a trading name of Smith & Williamson Investment Management (SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.