Supermarket shareholders braced for margins to hit historic lows

Supermarket shareholders braced for margins to hit historic lows

Investors call for Tesco to aggressively cut prices after market share hits 10-year low

Morrisons is to invest £1bn in prices over the next three years, with Tesco, Asda and Sainsbury’s expected to respond Photo: ALAMY

By Graham Ruddick

9:30PM GMT 15 Mar 2014

The biggest institutional investors in Britain’s supermarkets are bracing themselves for profit margins to hit historic lows after struggling Morrisons declared a price war to try to halt a decline in sales.

One top 10 investor in Tesco urged Philip Clarke, its chief executive, to be “dramatic” and slash the company’s margin in order to “reassert its UK dominance”.

The investor said they are prepared for profit margins in the sector to fall to almost 1pc, compared with Tesco’s peak of more than 6.1pc in 2010. “Typically margins trough at just over 1pc,” the shareholder said.

The pressure on the grocery retailers will be underlined this week when J Sainsbury reports its first decline in sales for nine years.

Sainsbury’s has enjoyed 36 consecutive quarters of like-for-like sales growth under chief executive Justin King, but that run is expected to come to an end this week.

Analysts at Barclays and Agency Partners have forecast that Sainsbury’s will reveal a 3pc decline in like-for-like sales.

The figures from Sainsbury’s are likely to lead to further accusations that Mr King is leaving the retailer at the top of the market.

The company announced in January that Mr King will step down as chief executive in July and be replaced by Mike Coupe, the commercial director.

Andrew Porteous, an analyst at Agency Partners, said: “Sainsbury’s is now cycling against a very tough period of comparatives, a period when last year it was strongly outperforming the industry, helped by its involvement with Comic Relief, but also, and likely to a larger degree, by its innocence in the midst of the horse-meat scandal.

“Nevertheless, while specific effects create tough comparatives, Sainsbury’s has seen its outperformance over its peers narrow quite a bit and management will need to offer comfort that this can be restored if Sainsbury’s is to regain is premium multiple.”

Billions of pounds were wiped off the value of supermarket retailers last week because of concerns that a price war will erode profit margins.

Morrisons has committed £1bn over the next three years to cutting prices in an attempt to recover sales lost to the discounters Aldi and Lidl. It warned that profits this year will be almost half what the City was expecting.

Analysts at Citi said Morrisons’ move “heralds a new era in UK food retailing”.

Investors are now watching Morrisons’ rivals to see whether they respond to the price cuts.

Much of the focus is on Tesco after industry figures showed Britain’s biggest retailer has seen its market share fall to the lowest level in a decade.

Mr Clarke has already sacrificed Tesco’s 5.2pc profit margin in order to lower the price of core grocery products such as carrots and milk. However, investors believe Tesco should go further given that its industry-leading margin provides the company with the most firepower in a price war.

The top 10 investor said: “He [Mr Clarke] is sitting there thinking what their optimal response should be. I would suggest their optimal response should be a big move.

If they do that, I think a lot of people would want to buy their shares, because it would reassert their UK dominance.

“It would be dramatic, but I think it needs to be dramatic to arrest the momentum.”

Pradeep Pratti, analyst at Citi, said that the “long-awaited profit reset in the UK grocery sector looks like it has finally begun”.

Mr Pratti said: “We believe Tesco will have to invest significantly more in prices to defend its market share from eroding to discounters, as well as a potentially more value-focused Morrisons.”