Why Sainsbury’s is SocGen’s favourite supermarket

When it came to supermarkets’ Christmas performance in the UK, the discounters claimed the victory.

Aldi and Lidl saw sales leap, both increasing their market shares. It was good news for high-end store Waitrose, too, which also saw a bumper festive period.

It’s the Big Four - or, at least, three of them (Tesco, Asda and Morrisons) - that suffered, with Sainsbury's the only store weathering cautious customer spending, seeing record sales in the run-up to Christmas.

According to bank Societe Generale, discounting is set to be the biggest game changer for supermarkets from here on in, as hard discounters’ market shares continue to grow.

And it thinks Sainsbury's is the best option when it comes to the Big Four.

Hard discounters

The European average market share for hard discounters is 13 per cent (excluding Germany). In Britain, it’s well below that - at 6.8 per cent - but that’s up 1.1 percentage points from a year earlier and double what it was 10 years ago.

Their success isn’t just cyclical - it’s driven by structural factors like offering more fresh produce, looking more like the Big Four and changing consumer habits.



The bottom is yet to be hit

The UK grocery market hasn’t hit bottom yet, explains the bank, and the journey could take some time.

It also thinks that consensus is still overly optimistic - its own 2015-16 earnings estimates for Morrisons and Sainsbury’s/Tesco are five per cent and 10/12 per cent below consensus respectively.

Sainsbury’s looks better than Tesco or Morrisons

SocGen warns that, although UK players might look inexpensive after marked de-rating in 2013, their valuations aren’t attractive because visibility is still poor.

It expects Tesco to go hard on the discounting, with pressure building when it comes to changing its strategy.

The bank has given Morrisons a ‘sell’ rating, too, as it thinks new businesses, in the shape of convenience and online, will “take a while to bear fruit”.

But while Sainsbury’s is not immune to a deteriorating market, it says that greater differentiation means it’s better armed, and it expects a "significant improvement" in cash flow over the coming years. It rates the supermarket ‘hold’.

Waitrose is, according to the bank, the most immune player, owing to strong and successful differentiation and its customers accepting higher prices.

Eyeing continental Europe

When it comes to opportunities in food retail, SocGen reckons continental European players “are in better shape” than UK counterparts.

Stabilised market conditions, optimised portfolios and more mature hard discount formats mean that it’s recommending switching from the UK (Tesco and Morrisons) to the continent (in particular, the supermarkets Dia and Casino).