When the collapse of Lehman Brothers triggered a global recession back in September 2008, bosses at the world's biggest grocery retailers must have felt mixed emotions. On the one hand, their businesses were well placed to weather the financial storm, as consumers have to buy food and drink regardless of the economic climate. And, with a tweak to the offer here, and a twiddle to the cost base there, sales and profits largely continued on an upward trend throughout 2009.
But the same wasn't true of share prices. In the course of 2009 and while the markets were up 20% to 30% on average only half the supermarkets in the new Grocer Share Price Tracker (GSPT) made gains.
And the index shows retailer share performance was hugely varied in 2009: while the share price of Russia's biggest retailer, X5, soared by 247.4% on the back of rapid expansion, Morrisons, which has consistently outperformed the competition in terms of sales and profit growth, endured a share price dip of 1.5% in 2009, returning to its pre-credit crunch valuation earlier this month. Even the Walmart juggernaut wasn't immune to the tumult in the financial markets its share price fell 5.2% in 2009.
"We have argued for some time that the market is becoming frustrated with both a lack of long-term structural growth and a lack of cyclicality from pure grocery retailers," says Matt Truman, a Nomura analyst. "In our minds, this is the key reason why Morrisons underperformed last year, as we argued it might."
Of course, in the same way that shares in banks and tech stocks made a strong recovery, the GSPT appears to have favoured supermarkets that were most exposed to the recession. It was inevitable that X5 would be hit by the devaluation in the rouble; and shares in Marks & Spencer nosedived partly as a result of its premium positioning. But there is some evidence that, with the M&S share price now well above the levels at the start of the credit crunch (see chart), investors overreacted to the turmoil.
Nevertheless, there have been significant casualties. Carrefour performed an embarrassing u-turn in Russia last year, pulling out of the market just four months after opening its first store. It was then forced to deny it was planning a similar retreat from Brazil and China announcing a $1.4bn investment in Brazil this January. However, rumours still persist that in markets such as Poland, Malaysia and Thailand, Carrefour could sell its operations to a rival, most likely Tesco.
Such uncertainty is indicative of the unpredictable state of the economy, where serious question marks remain about the path ahead, says Clive Black, head of research at Shore Capital, and "the minutiae of whether Heinz beans will sell more than Branston beans" are irrelevant against the bigger picture.
"Does the global economy recover in an orderly way led by Asia, Latin America and Russia, and with North America and Europe seeing steady growth, or do we face the prospect of further major disruptions, such as a double-dip recession leading to a further drop in demand?" he asks. "And can we have orderly currency markets with interest rates remaining relatively low without causing a surge in inflation?"
Another analyst is more concerned about deflation in 2010, however. "2009 was an ideal year for grocery retailers: they had high inflation and because they put up their prices that resulted in record profits.
"Generally speaking, share prices grew steadily at the start of the year but trailed off somewhat towards the end. That's because 2010 looks like it's going to be a much less straightforward year for supermarkets there are clearly reasons to be concerned about the industry."
While analysts have yet to reach a consensus on the bigger economic picture, they agree that some retailers are currently undervalued. The market is ripe for some gains in stocks for the likes of Morrisons, The retailer is highly rated by analysts a reflection of its strong growth and future potential and investors are keenly awaiting the arrival of newly appointed chief executive Dalton Philips. Tesco shares are also expected to grow in line with predictions that the company will overtake Carrefour to become the world's number two grocery retailer in 2012.
"The next five years will see Tesco [in effect] creating a new company with £27.3bn of sales, EBITDA of £2.6bn, and underlying EBIT margin of 7.3% as the business shifts materially away from its reliance on the pure UK grocery business," wrote Truman in a recent report on the European retail market. "Tesco remains the only business in our sector where the growth prongs are material to the investment case."
It's a similar story at Walmart, still considered an attractive and safe investment option, despite its recent share price woes. Walmart will add an extra 161 million sq ft of supercenter space in the US over the next five years alone a 30% growth rate.
"To put it in context, Tesco in the UK has a total of 34 million sq ft of space, so Walmart will add the equivalent of an extra five UK Tesco estates in the next five years, just in the US," says Rob Gregory, research director of Planet Retail.
Sainsbury's, however, is clearly not whetting analysts' appetites. There is little reason to buy the shares at the moment, cautions Nomura, as strong growth is far from assured given the reliance on a slowing top-line property business. Despite announcing plans to launch 50 new supermarkets across the UK, and to extend a further 50, by March 2011, Truman believes Sainsbury's "weak returns" are a real hindrance to its investment case.
Similarly, there is little evidence that Carrefour's turnaround plan is working yet, according to analysts at Bernstein Research. The world's second-largest retailer invested 600m in price across Europe in 2009, but still saw footfall decline 4.1% in its French hypermarkets in the quarter. This year, it plans to plough 230m into price (a total of 1bn over three years), a move that only served to increase Bernstein's scepticism. "It seems optimistic that Carrefour can deliver meaningful improvement in sales growth while significantly reducing its rate of price investment," a recent note said.
Nomura analysts believe the 1bn investment will only allow Carrefour to "stand still on price", while rival Auchan has turned up the heat, announcing plans to turn its 9,000 sq ft hypermarkets into hyper hard discounters.
If global publicly listed supermarkets have proved anything since the start of the recession, it is their flexibility. "To the credit of food retailers, they have all been very proactive to adapt, sometimes at the expense of margin, but they have tried to adapt, in particular, to cope with downtrading from premium to standard and value ranges."
The most successful repositioning work in the past year was Ahold's transformation from an expensive retailer to a fairly priced but high-quality one. But such practices have been common: in the UK, Marks & Spencer reduced capex and cut shareholder dividends to fund price cuts, while Tesco turned itself into Britain's biggest discounter.
The big question is what happens next? With the markets recovering, and credit now flowing again, further signs of stability are emerging. Barack Obama's proposed banking regulations may have upset markets when they were first announced but, according to Black, "the steps to de-risk the banks are likely to contribute to a reduction in volatility" in world markets, even if they may also contribute to a slower rate of growth.
All major economies are forecast to come out of recession this year. The US, which suffered the shallowest recession with GDP down 2.7% over the year is forecast to bounce back strongest with growth of 1.7%, according to Moodys.
In France, GDP declined 2.8% and is forecast to grow 1% this year, while the UK which suffered the biggest decline of the major economies, down 4.6% during 2009 is forecast to grow 0.8% in 2010. This, coupled with steady inflation and good northern-hemisphere grain harvests over the past few years, are contributing to a sense that the worst may be over.
There's even talk of M&A deals on the horizon, with Ocado predicted to float as early as May, and Booths another target being closely watched by the City.
The Grocer Share Price Tracker is comprised of the UK's four largest retailer plcs with significant grocery sales (Tesco, Sainsbury's, Morrisons and Marks & Spencer), together with 10 of the world¹s largest publicly traded grocery retailers: Ahold, Carrefour, Kroger, Metro, Morrisons, Safeway, SuperValu, Walmart, Wesfarmers, Woolworths and X5. The share price of each company's primary listing was taken on the first of each month (or first trading day of the month) and indexed against September 2008. The tracker value is an unweighted average of each company's index.
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