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Investing in supermarket shares

28/10/2020

In the four weeks to the 22nd March, UK shoppers spent an extra £1.9 billion on groceries. In the 12 weeks to September 6th, take-home grocery sales rose by 10.8%.

Figures like these show that not every sector has been ravaged by COVID-19, with supermarkets among the clear winners. It appears that this is even more the case for online grocery providers like Ocado, whose 155% share price hike since March has valued the brand higher than Tesco.

The question is: is this success likely to continue into the long term, and are supermarket shares a good investment right now?

 

The long term outlook for UK supermarket shares

Supermarket shares are often seen as a defensive stock. What this means is that there is constant demand for their products, meaning that they are likely to be more stable throughout every phase of the business cycle. 

While all investments, by their very nature, involve an element of risk, the theory is that supermarket shares should be less volatile than other sectors in the long term. And indeed, reasonable forward price to earnings ratios for brands like Sainsbury’s and Tesco cement that theory.  

Investors, though, must be careful not to treat every supermarket as the same. As more and more grocery shopping moved online during lockdown, discount grocers Aldi and Lidl were unable to compete with their traditional counterparts. 

However, it is not just their weaker ecommerce offering that affected the discounters, but their in-store experience, too. As James Anstead, Food Retail Analyst at Barclays, says, “If you are nervous about COVID-19, would you rather go to a supermarket with wide aisles and big car parks or a discount store that is smaller and more densely shopped?”

Grocery sales fell in August, coinciding with the government’s Eat Out To Help Out scheme, but still enjoyed their fifth consecutive period of double-digit growth. However, Kantar also point out that supermarket brands are continuing to look for ways to deliver greater value to their customers, through loyalty schemes like the new Lidl Plus app, Ocado’s partnership with M&S, and Aldi’s sponsorship of Great British Bake Off.

The UK food and grocery market, say IGD, is set to grow by 10% by 2022. However, they also highlight that some channels are likely to see more significant growth than others, giving those looking to invest in this sector some serious thinking to do. 

 

“Stable Rise Limited is not authorised or registered by the Financial Conduct Authority. The marketing materials are not intended to provide financial advice nor promote any individual financial products.”

 

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