Easing inflation, strong balance sheets and hamstrung rivals leave Tesco, Sainsbury's and M&S well set for steady earnings growth, even as weight-loss drugs reshape the trolley
Shore Capital's latest sector outlook makes a straightforward case: the listed UK supermarkets are defensive cash compounders, and the conditions of 2026-27 should let them prove it again.
The broker expects aggregate grocery sales growth of 3-4% this year, comfortably ahead of new space additions of just 1-1.5%. That gap is the structural engine behind rising sales densities and the free cash flow funding dividends and buybacks at Sainsbury's and Tesco.
Food inflation is cooling
After spiking close to 20% at the 2022-23 turn and re-accelerating past 5% in 2025 following Chancellor Rachel Reeves Budget's employer NIC hike, grocery inflation is forecast to drift to 2-2.5% by Christmas 2026.
Global commodity stocks are healthy, Brent crude is expected within a $55-70 per barrel band, and the known government-imposed cost pressures are gradually washing through rather than intensifying.
Weight-loss drugs are pressing on volumes, but mix compensates
GLP-1 drugs are now a structural headwind for grocery units, with an estimated 1.6 million Britons already using them. Shore Capital expects biscuits, snacks and alcohol to suffer, while demand for protein, fresh foods and premium private label strengthens, supporting margins even as aggregate units soften.
The balance sheet divide favours the listed players
Tesco PLC (LSE:TSCO), J Sainsbury PLC (LSE:SBRY) and Marks and Spencer Group PLC (LSE:MKS) hold roughly half the market and carry low non-lease debt.
Leveraged private rivals, Asda and Morrisons especially, are competing with one arm behind their backs. Aldi and Lidl's maturation at 18% combined share reduces the incentive for aggressive discounting.
M&S looks the valuation anomaly at 11.8 times financial year 2027 earnings, with a profit recovery ahead and growing optionality for shareholder returns before March 2028, the broker said.