Supermarket wars

25th September 2012

Today, supermarkets wield unprecedented power on a global scale, and they're cashing in on their reign, despite some blips along the way for stalwarts such as Tesco. This has sparked numerous innovations and changes in strategy to push forwards during difficult times.

Innovation and diversification

There is proof of diversification across the sector, with a never-ending news flow of new strategy.

And this doesn't simply relate to news today of the scrapping of Tesco's budget trademark blue-and-white-striped value range in their baskets, replaced by the new Everyday Value. Surprisingly, even during recession we're not likely to pick up the cheapest on the shelf if it simply doesn't look attractive.

Tesco's chief executive, Philip Clarke, has been making progress with the £1bn investment to turn around the performance of its stuttering UK business, unveiling a plethora of changes.

Earlier this year there was the announcement that Tesco was moving into internet radio by buying digital music operation WE7 for £10.8million.

Many say that innovation is the path to the regeneration of the UK economy, and Tesco has been among the most innovative retailers and should be reaping the benefits.

It was the first to introduce club-cards; it created International Sourcing and expanded into non-food products in its out-of-town stores. But of course, others follow suit.

Now its rolling out scores of "dark stores" for its internet operation. Ken Towle, Tesco's director of internet retailing, said it will seek to open "tens but not hundreds" of dot.com-only stores, as it seeks to keep up with rapidly growing demand for groceries ordered online in "dense urban areas".

Online accounted for 3.8 per cent of total grocery spend in 2011, and is forecast to rise to 6 per cent by 2016, according to the trade body IGD. So watch this space for others to do the same.

Other areas of business are also seeing the supermarkets' competitive streak shine. For example, Asda has cut petrol prices for both petrol and diesel in all of its 203 stores across the UK from. This means other supermarkets who manage petrol stations, including Tesco and Sainsbury's are likely to do the same. Morrison's has already announced that it will cut its petrol prices by up to 3p a litre.

However, given the fact that shoppers are not maxing out their credit cards any longer you have to wonder: how are all these stores going to make acceptable profits, never mind grow them?

Yet innovation is a growth strategy rather than a preservation strategy. Equally, for innovation to be useful in growing a company's revenues, it needs to be something that is not easily and quickly replicated by competitors. Tesco arguably effected a retail revolution but it didn't protect it.

Despite this, when considering which blue chip stocks to slot into an investment portfolio Tesco often tops the list. It's proved an investment stalwart in the past, and the likes of Warren Buffet snapped up over 5% of the supermarket giant earlier this year.

Tesco scores points for its low P/E and industry-leading operating margin. It just loses out to Sainsbury on historic earnings growth but falls down badly on forecast earnings growth, where Morrison takes the point, says analysis by the Motley Fool. Although experts remain divided on which supermarket is the best to pop into a portfolio.

John Kingham, Mindful Money Blogger, said earlier this year: "The future is uncertain, but some companies have already proven that they're capable of generating consistent earnings.

"Companies which have generated consistent and unbroken profits for many years are perhaps more likely to continue to generate a similar level of profit than those companies which cannot generate consistent profits."

"…Without growth a company will be eaten by inflation, so even though Buffett is a value investor he always has one eye on what a company's sustainable growth rate is likely to be in the long-term."

So it remains to be seen whether supermarkets can continue over the long-term ability to generate cash, earnings and dividends. The future is anyone's guess – but they are definitely making waves in the retail world, and this can only be positive.

 

More on Mindful Money:

Tesco: Innovation and ineptitude

Are supermarkets past their sell-by dates?

In brands we (mis)Trust

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