Sainsbury Goes To War With Tesco

Published in Company Comment on 10 October 2011

Sainsbury hits back at Tesco's £500m 'Big Price Drop', but will supermarket shares suffer?

With one pound in every eight spent on the high street going into the tills of Tesco (LSE: TSCO), rival retailers dread every new campaign that the supermarket Goliath launches.

The 'Big Price Drop'

On 22 September, Tesco fired its latest shot in the never-ending war between supermarkets. It unveiled the Big Price Drop, a £500 million campaign to cut the price of 3,000 everyday staples, including milk, bread, fresh fruit and vegetables.

Within days, big rival Sainsbury (LSE: SBRY) hit back, warning that Tesco's latest campaign was accompanied by £350 million of cuts to its Clubcard loyalty programme. Thus, Tesco customers would be better off only by £150 million and not the headline-grabbing half-billion pounds.

Sainsbury launches 'Brand Match'

Of course, it was only a matter of time before Sainsbury (current slogan: 'Live Well For Less') responded with a price-cutting campaign of its own.

From this Wednesday, Sainsbury will introduce its 'Brand Match' promotion, which will match the prices of Tesco and ASDA on certain key products. To do this, Sainsbury will provide customers with coupons to cancel out the difference between its prices for branded goods and those of Tesco and ASDA.

To qualify for this Brand Match offer, Sainsbury's customers need to spend £20 or more, and all coupons handed out must be used within two weeks. Sainsbury recently tested this promotion at its stores in Northern Ireland, before rolling it out UK-wide.

Troubling times

Clearly, in this new age of austerity, retailers are desperate to keep loyal shoppers spending, as well as to attract new customers. With the cost of living rising by between 4% and 5% a year and wage rises subdued, disposable incomes are falling at their fastest rate since 1921.

Indeed, Tesco last week revealed its first fall in UK like-for-like sales in 20 years, down 0.7% excluding petrol and VAT. Even so, Tesco's overall revenues rose by 7.8%, thanks to a strong performance from its overseas operations. Sainsbury fared better in the UK, reporting like-for-like sales growth of over 1%, but remains a distance third in the UK's league table of supermarkets.

Should shareholders be worried?

In my view, shareholders in these battling retailers should lose no sleep over these latest shots in the battle for high-street spending.

Indeed, these and similar price-cutting campaigns can largely be dismissed as nothing but marketing gimmicks. Cutting £150 million from its revenues is a drop in the ocean for Tesco, while Sainsbury executives know that perhaps half of the Brand Match vouchers it issues won't be redeemed.

In short, both campaigns are aimed at grabbing shoppers' attention and winning headlines, but will do little to reduce the cost of a weekly shop. In fact, one survey conducted before last Christmas found that the majority of such price cuts amounted to a mere penny per item!

Valuations

As I write, Sainsbury shares are up a penny at 293p, valuing the group at £5.5 billion. They trade on a forward price-earnings ratio of 10.8 and offer a forecast dividend yield of 5.4%, covered 1.7 times.

Tesco shares are trading up 3p at 408p, valuing the UK's biggest grocer at £32.7 billion. They trade on a forward price-earnings ratio of 11.4 and offer a forecast dividend yield of 3.8%, covered 2.3 times.

Hence, value investors and dividend devotees will probably favour Sainsbury as a potential takeover target, while fans of big brands and market dominance will go for Tesco. Of course, you could hedge your bets by buying a bit of both...

More from Cliff D'Arcy:

> The Motley Fool owns shares in Tesco.

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Comments

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BigJC1 10 Oct 2011 , 12:53pm

I hold both but it strikes me that Sainsbury are in a much worse position. The Bank of England have just decided to further devalue sterling and boost inflation via QE so inflation at 5%+ looks to be with us for the long term, at the same time unemployment will accelerate in coming months. At some point wage increases will chase RPI and inflation will really take off and Mr King has neither the good sense or backbone to control it (once the genies out of the bottle .....).

If Tesco are losing sales in the UK it seems likely Sainsbury will be buffeted by the same winds - Tesco have the resilience of overseas sales in growing markets to rely on.

Dozey1 10 Oct 2011 , 2:15pm

Tesco's cuts are all smoke and mirrors, and fools hardly anyone. Sainsbury's paper-chase response is an administrative nightmare, from the sounds of it. Asda is part of Wallmart and not quoted in London. Morrisons is the obvious choice: yield 3.5% twice covered, PEG<1.0, minimal debt compared with massive property portfolio and still room for expansion.

snoekie 10 Oct 2011 , 3:35pm

Anyone shopping at Tescos can hardly have failed to note the price hikes in many of their goods over the last year.

Tea 67p to 93p.

Cornflakes £1.20 odd to £1.48.

Meat generally hiked 30%,

Conserve, £1.48 to £1.96 (or thereabouts)

to mention but a few.

Cuts, perhaps, but the price hikes outweigh by far the so-called cuts, which will be temporary, whilst the hikes will be permanent.

rober00 10 Oct 2011 , 4:53pm

Oh good!!

Sainsburys are going to issue me with yet another voucher to add to the 6 or so (5 of which are just waste paper) I already get.

richjfool 10 Oct 2011 , 5:03pm

I'm sticking with Tesco and Morrisons, thanks.

CunningCliff 10 Oct 2011 , 5:16pm

Evolution Securities warns that Sainsbury has a weaker balance sheet and is paying dividends using debt, see:

Retail bully boys must not protect themselves unfairly
http://www.ft.com/cms/s/0/eb78f00c-f0d5-11e0-aec8-00144feab49a.html

Cliff

pickepics 10 Oct 2011 , 5:45pm

As a shareholder, I'd be far more concerned about any holdings I may have in their suppliers' shares rather than in these two. Doubtless they are the ones who will be bullied into bearing the bulk of any cost. Exactly the point the author of the FT article was making.

Next, I would be looking to the effects on the market sector. Those two drawing attention to themselves and, for what reason is beyond me, Asda, is an attempt to take shoppers out of other stores into their own. So the losses if any will more likely fall upon Morrisons and the smaller retailers such as the Co-Op and whatever remains of the regional chains insofar as there is an overspill from the more obvious target.

Savvy shoppers have already been deserting all of of the above in droves throughout this recession. They have been looking for real, consistent value rather than the occasional, short term "special offer". I am sure that, in fact, the initiatives are to draw those shoppers back from the European chains, mainly Lidl and Aldi, rather than to specifically target any of the other big four chains.

My conclusion is that managements of both Tesco and Sainsbury's will point to the success of their campaigns later to convince shareholders and new investors their money is in safe hands, wherever they actually pull the shoppers from to roughly maintain current levels of trade whilst others' continue to fall.

RobinnBanks 10 Oct 2011 , 7:47pm

Tesco could increase their turnover considerably if they kept their shelves filled up; numerous items are out of stock every week.
There were price hikes of up to 30% on some items over the last few months so they could reduce them for the latest campaign.
They were selling Bell's and Teacher's whisky for £13 a litre a month ago, now it's back to over £20: an extra 54% profit per bottle.
Remember when the price of meat doubled due to the foot-and-mouth outbreak? It hasn't come down yet, and there have been no further outbreaks reported; still, we get a penny in the £ on the clubcard to compensate!
We are told inflation is 5%: Mervin King should ask his wife about it!

jaizan 10 Oct 2011 , 8:41pm

I also notice Tesco failing to keep the goods on the shelves & generally providing poor service.

This was one of the problems which contributed to reductions in Sainsburys profits about 8 years ago. Tesco seem to be heading the same way.

pa13 10 Oct 2011 , 9:08pm

I thought empty shelves increased supermarket profits - seems to me to be usually the best value items which are out of stock.

UncleEbenezer 11 Oct 2011 , 12:34am

I'm with Floorlord in being more concerned about their suppliers. Wondering for instance whether PFD's latest profit warning reflects an element of being squeezed by the supermarkets price war, or whether that's more a New Broom effect. Safety amongst suppliers would presumably lie with the strongest, like RB and ULVR.

Meanwhile those of us with neither a Tesco nor a Sainsbury in town just get to miss out on the upside of a price war.

jackdaww 11 Oct 2011 , 8:29am

tesco presumeably know about empty shelves and presumeably are working on it.

which means there is room for improvement which is something i look for in a company.

divitiae 12 Oct 2011 , 11:24am

mark up is about 37% so it is better to stock 1 too few items than 1 too many.

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