The outlook for the food retail sector, which has performed well since March due to defensive market...
The outlook for the food retail sector, which has performed well since March due to defensive market positioning, is uncertain as growth stocks look to be regaining strength.
Nick Purves, UK equity fund manager at Schroders notes that market rotation is turning back towards growth stocks again and food retailers could be hurt with the switch in investor attitude.
Mike Felton, director of Pan European equities at Royal & SunAlliance believes the sector will remain under pressure with inflation in the high street absent and a lack of pricing power.
Tesco continues to be the star performer of the premier league of food retailers, which includes Sainsbury and Safeway. Tesco has performed well in the last five years at the expense of the other two.
At the end of March 1995 Tesco shares stood at 89p by last week it was 217p. By contrast Sainsbury has fallen from 427p to 362p while Sainsbury has gone from 287p to 267p.
Fund managers agree Tesco has found itself in a virtuous circle of sales growing successfully and 'operational clearing' where profits are rising more than sales. Purves says: "Tesco has been pricing the competition out of the market."
According to Colin Morton, UK fund manager at BWD Rensburg, "Tesco is all for expanding into Eastern Europe, which costs a lot but has the potential to earn a lot of profit for it."
Morton says the 1980s was a period of rapid growth for all supermarkets with planning permission easy to come by for new stores. In the 1990s it became more difficult to get permission to open stores and the only way to grow was to entice more people to spend.
Tesco concentrated on becoming the market leader, introducing the Clubcard in the mid 90s, originally scorned by Safeway, which then went on to introduce the Reward Card, Morton says.
Another advantage for Tesco is that it is the most advanced of the three in the internet, notes Felton, adding the company has become one of the biggest e-grocery retailers in the world.
Purves says: "The area of convenience food will be interesting and Tesco is trying to move into this market, with little convenience shops called Tesco Metro."
The 1990s saw a reversal of fortune for Sainsbury, which had performed well in the previous decade.
On the upside for the group the market has reacted favourably to the new CEO, Peter Davis, formerly of Prudential and has recently re-rated its shares.
Morton says Davis is trying to take Sainsbury back to its previous position of quality rather than price. It is focusing on retailing, he says and its stocks have risen by around 20% over the past few weeks.
Purves says: "Sainsbury is steadying the ship and has been holding the sales line for the past few months. It is taking costs out of the business and trying to grow profits."
The group has put its subsidiary Homebase up for sale and is looking to do something with its North American business, he says. He believes Sainsbury is positioned to do well in the future. Fund managers agree Safeway is the most vulnerable of the three. Morton says: "Wal-Mart wants to be the number one food retailer in UK and Safeway is the most obvious buy."
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