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Sancho Panza

Supermarkets Braced For Historic Low Margins

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Telegraph 16/3/14

'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.

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."'

The big four do seem be adding a disproportionate amount of floorspace given that the market is saturated already.If this isn't deflationary,I don't what is.

Edited by Sancho Panza

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So treating your customers like shite has not been the path to success that Tesco imagined after all? Maybe a few less 'special offers' that turn out to be at best mislabeled and at worst downright deceptive might be a step in the right direction.

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i sawa bbc headline a cpuple days ago along the lines of

FEARS OF A SUPERMARKET PRICE WAR CAUSE SHARE PRICE DROP.

yes...we shoukd all be scared of those lower prices.

the bbc bias is tangible.

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i sawa bbc headline a cpuple days ago along the lines of

FEARS OF A SUPERMARKET PRICE WAR CAUSE SHARE PRICE DROP.

yes...we shoukd all be scared of those lower prices.

the bbc bias is tangible.

Probably BBC pension fund is invested in Tesco on top of all the BTL's :lol:

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So treating your customers like shite has not been the path to success that Tesco imagined after all? Maybe a few less 'special offers' that turn out to be at best mislabeled and at worst downright deceptive might be a step in the right direction.

Worked for the banks?

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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."

Aldi and Lidl = "discounters".

Morrisons = "value focused".

:rolleyes:

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Worked for the banks?

Still is working for the banks, and new customers are lapping it up all the time. A lot of the customers taking up the banks' offerings do deserve to be treated with contempt.

Price war on mortgages (providing you put down 50-60%), and now higher LTVs on offer at fairly low rates. Gov now throwing in special offers of HTB1 + HTB2.

Bank price wars to help shift big-ticket-items = huge mortgage debt, and velocity of such debt.

yes...we shoukd all be scared of those lower prices.

:lol:

Morrisons restructuring sparks fears of new price war http://www.bbc.co.uk/news/business-26556924

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Supermarkets should be out campaigning for lower housing costs. Nothing else is going to put money back in their customers' pockets.

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Still is working for the banks, and new customers are lapping it up all the time. A lot of the customers taking up the banks' offerings do deserve to be treated with contempt.

Price war on mortgages (providing you put down 50-60%), and now higher LTVs on offer at fairly low rates. Gov now throwing in special offers of HTB1 + HTB2.

Bank price wars to help shift big-ticket-items = huge mortgage debt, and velocity of such debt.

:lol:

Morrisons restructuring sparks fears of new price war http://www.bbc.co.uk/news/business-26556924

Perhaps the supermarkets should be "selling" food protection insurance?

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Supermarkets should be out campaigning for lower housing costs. Nothing else is going to put money back in their customers' pockets.

Maybe they can consider selling some of their aircraft hanger style potential mega superstores that nobody no longer wants to shop in or travel to, and build some affordable homes that their staff can afford to buy with their wages. ;)

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Supermarkets should be out campaigning for lower housing costs. Nothing else is going to put money back in their customers' pockets.

Ever increasing housing costs impact the economy. Once the PPI money runs out retail figures are going to slide.

The burden of financialization is at last coming to the front.

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Ever increasing housing costs impact the economy. Once the PPI money runs out retail figures are going to slide.

The burden of financialization is at last coming to the front.

..... the middle still has lots of excess and there is far too much waste, many people still have the capacity to cut back if they have to, or even better do things and shop differently, make do and mend, reduce the purchase of expensive luxury, time saving processed foods full of colourants, flavourings, preservatives, salt and sugar.....some are already doing this to reduce their debt pile and end up richer, fitter, and healthier......why do you think people are now living longer, war rations must of partially helped in this, we eat far too much, and far too much of the wrong foods imo..... ;)

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Seriously - if the supermarkets are already running at low margins they really need to take a hard look at their business models. They haven't represented value for years - quality is far lower than my local grocer / butcher and prices are at best parity and generally higher (unless you want low welfare food which my butcher doesn't sell).

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I do wonder whether the new lower price of shares does indeed the new valuation of the supermarkets. Everyone seems to think Tesco and Sainsburys will bounce up to 4 quid or higher again but perhaps the new reality will be 3 quid as the 'top' with both trading eventually in the 2.50ish to 3.00ish range. Ditto Morrisons in the 1.70ish to 2.10ish range.

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Maybe they can consider selling some of their aircraft hanger style potential mega superstores that nobody no longer wants to shop in or travel to, and build some affordable homes that their staff can afford to buy with their wages. ;)

Very good idea, some of the big out of town places are empty most of the time nowadays anyway? Good to see the big companies sucking up some deflation.

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....when the big supermarkets started to expand opening more and bigger units the small local shops could not compete with their prices or the variety of different products and huge choices, that have only increased over time, today there are over 50 odd different yoghurts (that can be made very simply at home) whole aisles of different snacks and crisps, numerous different brown, tomato and other sauces, powders, in a jar, ready made liquids, kits, cubes, hot, mild or indifferent......the local stores may have fewer choices but they can compete very easily now with both price and quality sourced locally.....not only that they sell what local people ask for, and they know that what they sell will sell, having a quick turnover of both fresh and non perishable goods the stuff that often stay sitting on supermarket shelves for months.... ;)

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This type of thing is what puts me off investing in shares.

Sainsbury have a market capitalisation of just under £6b, make a decent profit, pay a dividend of nearly 5% and own a lot of assets. P/E ratio of around 9.

Ocado have a market capitalisation of £3b, make a big loss, pay no dividend and could be wiped out by John Lewis. PE ratio of 221.

For those valuations to make sense you have to anticipate that at some point Ocado will be generating profits roughly 50% of Sainsbury's current income. Given supermarkets are set for record low margins it means you have to assume delivering food will be more profitable than selling it.

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This type of thing is what puts me off investing in shares.

Sainsbury have a market capitalisation of just under £6b, make a decent profit, pay a dividend of nearly 5% and own a lot of assets. P/E ratio of around 9.

Ocado have a market capitalisation of £3b, make a big loss, pay no dividend and could be wiped out by John Lewis. PE ratio of 221.

For those valuations to make sense you have to anticipate that at some point Ocado will be generating profits roughly 50% of Sainsbury's current income. Given supermarkets are set for record low margins it means you have to assume delivering food will be more profitable than selling it.

It doesn't make a great deal of sense.

Edited by Sancho Panza

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It doesn't make a great deal of sense.

I don't think the real value of a business has much to do with the price of the shares any more......fast trading, anticipating a rise or fall, short or long, held sometimes for minutes or days, money made quickly with a calculated bet, nothing much to do with holding out for the long-term, more all about making a quick killing while they can...... ;)

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My good lady has just done a full month (4 week shop) trial switching from Tesco to Aldi purchasing the brands she usually buys which accounted for around 80% availability in store and the other 20% own label alternatives, I couldn't honestly tell or taste any real difference, her monthly saving for the month was £130. Cant believe that we have been sucked into the large supermarkets with their phoney offers Bogof etc for so long. The downside is the tills are not very customer friendly and Aldi store near us was hard to park the car and was very busy in the isles apart from that no real difference , we will save around £1500 cash per annum. This is for a two adult household .

Might buy a BTL with my new found wealth :D

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Supermarkets should be out campaigning for lower housing costs. Nothing else is going to put money back in their customers' pockets.

Maybe if they paid their own staff higher wages, they would have more money to spend.

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Hmmm, all this talk about supermarkets making less profit and being forced to cut margins to the bone to maintain market share isn't really gelling with the 'turbocharged economic recovery' propaganda being pushed in the mainstream media, is it? :P

As another poster has said, when the stealth PPI stimulus cash starts to peter out, the economy is in big trouble. Maybe the authorities can come up with another excuse for a helicopter drop of cash? Hey, I'm all for it as long as this time they give it to everyone and not just the idiots who lived on debt over the last decade or two. :lol:

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Hmmm, all this talk about supermarkets making less profit and being forced to cut margins to the bone to maintain market share isn't really gelling with the 'turbocharged economic recovery' propaganda being pushed in the mainstream media, is it? :P

As another poster has said, when the stealth PPI stimulus cash starts to peter out, the economy is in big trouble. Maybe the authorities can come up with another excuse for a helicopter drop of cash? Hey, I'm all for it as long as this time they give it to everyone and not just the idiots who lived on debt over the last decade or two. :lol:

---

They are already looking into it.....

http://www.bbc.co.uk/news/business-26780863

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