Are Food Retailers Defensive?
With consumers set to be squeezed after the 2010 election, supermarket shares may not prove to be as defensive as they used to be. Stockmarket folklore has it that supermarket shares are defensive because people always need to eat and this held true in the days when supermarkets only sold groceries. But these days supermarkets sell far more than just groceries. With Tesco taking one pound in every eight spent by British consumers, they will not be able to escape the effects of consumers battenning down. It is true that food retailers are shifting their offering downmarket in an effort to follow their customers as they trade down in tough times. However not every food retailer will be able to protect their sales volumes & profits in this way.
Sales of organic produce fell 14% in 2009, indicating that consumers are already trading down, with organic meat sales being hit hard (beef down 25% and chicken down 28%). Consumers may buy organic & ethically produced food when they feel they can afford it but with the Food Standards Agency stating that there is no scientific evidence that organic food has health benefits, when the squeeze comes consumers will trade back down quickly.
The pain thus far has been felt most by those people who have lost their jobs during the recession. As interest rates have been cut sharply, the vast majority who are employed have seen their monthly budgets improve as mortgage payments have fallen. However any post-election tax increases are going to be felt by all 29 mln employed people in the UK (and their families) and this effect will be very broad-based indeed. The supermarket shopper is going to look to cut back even further and now that the weaker retailers have already gone bust, the one-off boost to the survivors’ sales has already been seen and all are likely to suffer.
The counter-argument to this is that consumers will cut back on eating & drinking out and spend more on their weekly grocery shop instead. This will affect the pub & restaurant sector (which has already de-rated in anticipation and offers better value than supermarket shares). It remains to be seen what consumers will choose to do when the squeeze is applied by a government seeking to get the budget deficit back under control, but investors should choose to invest where the risks have at least been somewhat discounted and upside is on offer.
However with Tesco, Sainsburys and Morrisons all trading on 13x estimated 2010 earnings, yielding 2.9%, 4.1% and 2.1% respectively, these shares are not a Buy. If you feel compelled to hold a food retailer then SBRY yields the most and benefits from periodic bouts of takeover speculation. Much better value is available elsewhere in the market and owners of TSCO, SBRY or MRW should sell out of them as they are too highly rated, still trading within 8% of last year’s highs, and do not offer sufficient upside to compensate for the risk that their sales start to suffer later this year as consumers begin to be squeezed.
Tags: british consumers, defensive stocks, economy, food retailer, Morrison, MRW, organic food, pubs, recession, restaurant, Sainsbury, SBRY, supermarkets, tax increases, tesco, TSCO