The rise of discount grocers has forced the UK’s so-called ‘Big Four’ supermarkets to take a good hard look at themselves and change the way they do business.
German discounters Aldi and Lidl have been chipping away at the market share of the four largest supermarkets –Tesco PLC (LON:TSCO), J Sainsbury PLC (LON:SBRY), WM Morrison Supermarkets PLC (LON:MRW) and Asda – creating a price war that has squeezed margins.
Wholesale business drives sales growth at Morrisons
In response to the fierce rivalry, Morrisons and Tesco have expanded into wholesale supply while Sainsbury’s is in the process of trying to merge with Asda.
Third quarter results from Morrisons on Tuesday underlined the sector-wide challenge of trying to lift supermarket sales in a competitive market.
Morrisons said retail sales in the 13 weeks to 4 November rose 1.3% on a like-for-like basis, slowing down from the 2.5% increase reported in the second quarter when it received a boost from the World Cup and warm weather.
In contrast, like-for-like sales in the wholesale division gained 4.3% in the third quarter after a 3.8% rise in the previous three-month period.
READ: Morrisons sales growth slows without benefit of World Cup and warm weather
The wholesale business has secured deals with Amazon.com Inc (NASDAQ: AMZN), Rontec, Sandpiper, McColl’s Retail Group (LON:MCLS), MPC Garages and Big C.
“Clearly the move into building out its wholesale division was a smart one and one that has been consistently under-appreciated by the market,” said Neil Wilson, chief market analyst at Markets.com.
“It’s capital-light growth lever that deserves investors to take notice. The wholesale contribution to group LFL growth is really starting to be felt and should get a lot more attention than it currently does.”
Morrisons expands product ranges to lift supermarket sales ahead of key Christmas trading
In a bid to lifts sales at its own supermarkets, Morrisons has been expanding product ranges and improving its digital services. It has started offering more loose local produce, cheaper wonky vegetables and more products in its “Best” premium range.
Morrisons plans to launch a new vegan range and children’s brand called ‘Little Kitchen’ next week. In the third quarter, it launched the Morrisons More app, which allows users to collect loyalty points, receive offers, shop for groceries and look for recipes.
The attention now turns to the group’s key Christmas trading update.
“In a very competitive market place, investors in the group will be hoping that it can entice some new shoppers through its doors in the run up to Christmas,” said Graham Spooner, investment research analyst at The Share Centre.
“Morrison’s is trying to be different and the launch of its ‘naturally wonky’ fruit and veg range, alongside cost cutting in an attempt to gain market share demonstrates it is making steps. Nevertheless, there is so much choice and competition concerns are not going to go away so as a result, we continue to recommend Morrison’s as a ‘hold’ for medium risk investors.”
Booker and Carrefour deliver synergies for Tesco
Tesco has also branched away from its core retail operations with the acquisition of wholesale business Booker, which was completed in March.
Booker contributed 11.8% to Tesco’s sales growth in the first half to 25 August and is expected to deliver cost synergies of £60mln this fiscal year, growing to a cumulative £140mln in 2019/20 and £200mln by 2020/21.
Tesco, which publishes its third-quarter trading update on 11 January, also formed a “strategic alliance” with French retail giant Carrefour earlier this year that aims to save costs by strengthening their buying power with suppliers and sharing own-brand products.
Sainsbury and Asda merger expected to dethrone Tesco as market leader
Tesco is the UK’s largest supermarket in terms of market share but it could be overtaken by Sainsbury’s proposed £7.3bn takeover of Walmart’s Asda. The deal is currently being investigated by the Competition and Markets Authority.
Ahead of Sainsbury’s interim results on Thursday, Hargreaves Lansdown equity analyst, Sophie Lund-Yates, said the firm’s operating profit has been moving in the wrong direction recently as it grapples with the disruption caused by Aldi and Lidl and online rivals, notably Amazon following its acquisition of Whole Foods.
Challenging market conditions prompted Sainsbury’s to reduce its reliance on supermarket sales by purchasing catalogue retailer Argos in 2016.
Lund-Yates said on the Argos deal: “Signs so far are good. Sainsbury’s hoping 90 Argos units will be opened in stores this financial year, and next week’s results will show if it’s on track to deliver £160m of synergies by next Spring.”
She added: “Of course the main event is Sainsbury’s potential merger with ASDA. But while it’s waiting for the thumbs up from regulators, we’re unlikely to hear much on this front. However, we’ll still be on the look-out for any details on what would become the UK’s largest food retailer.”