I have long argued in this column that Tesco (TSCO) is in serious danger of losing its top spot among supermarkets, just as the once impregnable Sainsbury (SBRY) fell from grace. Sales figures this week suggest that Tesco is still on track to fulfil my fears.
It is not just the 0.5% decline in UK like-for-like sales in the 26 weeks to 24th August that bothers me. Increasingly, home deliveries are making the comparable store sales irrelevant, and Tesco has led the way in doorstep sales.
What is really disturbing is that Tesco is under pressure around the world. It has led the way in overseas expansion, too, and the international side of the business has been growing strongly from a low base, at least partly offsetting worries back home. Like-for-like sales were down 3.7% in Asia and 5% in Europe, which is pretty grim.
The outcome is that half-year pre-tax profits fell 24% to £1.39 billion. Chief Executive Philip Clarke has not yet demonstrated that he has got a grip on a company that was already on the slide when he took over.
Turning round ailing supermarkets is never cheap and Clarke earmarked £1 billion for a plan to reverse the decline in sales. He claims that the UK performance has improved, with food sales up 1% in the second quarter and sales in revamped stores up to 5% ahead. ‘Up to’ does not mean 5%, it means no store improved by more than 5% and some by a good deal less.
Clarke says the fact that the investment has not translated into a stronger group performance does not invalidate the strategy. Oh yes it does. Until things get distinctly better the strategy has not worked.
What is particularly irritating for Tesco shareholders is that on the same day Sainsbury reported like-for-like sales growth of 2% in the 16 weeks to September, taking the figure for its first half up to 1.4%, with total sales up 5% in price and 2% in volume. Although the two first halves are not identical they are close enough to make comparisons.
Sainsbury is selling more of its own label foods and is rapidly catching up with Tesco in home sales and convenience stores.
The momentum is with Sainsbury, which is why I am happy to keep it as one of the three largest holdings in my portfolio. Tesco shares fell initially on its results but then investors started to buy the ‘recovery is on course’ line and the shares moved higher than they had been before the figure were released.
It’s too much for me to swallow. I reckon that the Tesco share price rise is an opportunity to get out. The case for Sainsbury is admittedly tricky, because progress has already been recorded in the share price but if I wanted to add a supermarket to my portfolio I would be looking to buy Sainsbury on any share price dip.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.