A sceptic might point out that the grocery market is mature, with few remaining opportunities for consolidation, little likelihood of large-scale foreign entry into the UK and too much regulation. All of which is true, but when you add attributes such as high barriers to entry, strong asset backing and a higher than average quality of management, the sector looks in better shape to withstand the slings and arrows of outrageous fortune than most others.
So, for investors who prefer not to follow the herd, I offer a few suggestions to help them decide where to put their money. I am not in the business of peddling one retailer’s shares and damning the rest – there are plenty of tipsters who do that. Each of the quoted majors has its own set of attributes which have to be judged against the well-known structural and behavioural factors that drive success in food retailing.
The foundation is the size, distribution and quality of the store portfolio. Safeway struggled because it was slow to realise the superstore was the format of the future. Tesco was the first to do so and invested in every good location it could get. Others have been trying to catch up but the planning system has been an obstacle.
The portfolio drives the second critical success factor – the level of exposure to effective competition locally. There are numerous locations where there is scope for new entrants but the barriers are formidable. This is unlikely to change in the future. The third factor is economies of scale, which drive supply terms, reduce overheads and enable retailers to balance price-cutting and protecting margins. All the multiples share these advantages, albeit some more than others.
The behavioural factors are potentially more ephemeral – customer loyalty, product quality and value, strategic thinking, operational speed and efficiency. All the majors have them in varying degrees, which is why, according to TNS, they are now strengthening their market leadership. Not a bad bet, really.
Kevin Hawkins is an independent retail consultant.