Tesco and Sainsbury’s outlook is improving according to JP Morgan with Asda and Morrisons having no capability to fight back while pressure from the discounters is easing.
“Neither Asda nor Morrison has the means nor the appetite to alter the status quo in the grocery market, which is likely to be a positive for the incumbents in terms of ensuring a rational market backdrop.”
Aldi and Lidl, the discounters, will continue to make inroads, though JP Morgan does not expect “exacerbated pressures in the current environment”.
On margins, the US bank also sees the food price inflation outlook as being favourable.
Producer price inflation (PPI) is easing faster than consumer price hikes (CPI), giving gross margins a boost, while higher personnel costs are being passed through.
“Into 2023, we believe the entire industry to be entitled to fully pass on the cost inflation to consumers.
“And yet, we sense the grocers have learnt the lesson from the GFC (global financial crisis) and are cautiously protecting their price positioning vs discounters, investing in prices of overlapping essential assortment.”
Tesco is rated 'overweight' (with Sainsbury 'underweight') on its more reasonable valuation, market expectations, and a more defensive mix.
Shares in Tesco were up 0.8% at 281p and Sainsbury’s by 0.9% to 276.5p.