Supermarkets … big deal or little deal?

Reading the business press over the holidays, you’d be forgiven for thinking something profound was happening in the UK supermarket sector.  Apparently, the Evil Old Guard led by Tesco are falling to pure and unsullied discount retailers such as Aldi and Lidl.

Maybe something profound is happening.  But I doubt it.  I suspect it’s just a cycle.

Indeed, lots of things feel profound in January.  For example, I have been running 3 times, I’ve done reading with my daughter 4 times, I’ve not touched alcohol and I’ve drunk loads of water.  So far, January is bordering on life-changing.

However, no matter how hard I try things will eventually return to normal.  I’m hard-coded to live a certain way.

I think the same is true for the UK economy and, for this reason, all the profound changes reported by the press will, over time, prove to be relatively minor adjustments.

The biggest victim of the supermarket revolution is reportedly Tesco which you’d think is now fighting for survival.  However, it’s interesting to draw some parallels between Tesco and the Irish airline Ryanair.

Like Tesco, Ryanair built its business on being cheap and offering no frills.  My personal attitude to both companies has always been similar:

With Ryanair, I am ok using them if I’m travelling alone with a small bag.  However, I won’t take the kids because I worry they’ll incur a surcharge for being too fat … or they’ll be banned from using the toilet.  With Tesco I’ll happily buy bread, bananas or Weetabix … but I still reckon their beef is made from retired greyhounds (joke).

So, let’s cast back our minds to September 2013 when Ryanair issued its second profit warning in 2 months.  The share price fell by 11% and Ryanair was described as facing “a more difficult operating environment than several of its peers” (David Holohan, Merrion Stockbrokers).

The analysis at the time was probably true, but the feeling that the market had shifted irretrievably away from Rynair was clearly a huge exaggeration.  In the end, Rynair reacted effectively and, following a few relatively minor alterations to customer service, saw passenger numbers increase by 4% in December.  Its share price has increased by 80% since the second profit warning was issued*.  So, in the end, the profound threat to their business really wasn’t a big deal.

Tesco have a bigger job on their hands, but already their in-store changes have seen an improved performance in Q4 2014 … indeed Morrisons are now the worst performing supermarket in the UK with a slide in sales of 3.2% in this period against Tesco’s 2.7%.  It therefore wasn’t a huge surprise to hear the news today that their CEO will be leaving at the end of March.

And I wonder what the future really holds for Aldi and Lidl.  I remember with Rynair the comments started with “I went to Amsterdam for £5” … then changed to “Rynair charged me £5 just to pay by credit card” … to “I’d rather pay more and go with EasyJet”.  And only this morning one of my colleagues said to me “Lidl is a nightmare … they won’t let you pack your bags at the till …”

Maybe it will be the discount retailers who’ll have to think again about their strategy … and I’m sure they will do so effectively and quickly because, like Rynair and Tesco, they are run by intelligent and experienced management.  However, this will not prevent it being reported as profound and market-changing if and when it happens.

* This doesn’t mean the Tesco share price is going to increase.  I may try to sound knowledgeable but, for the avoidance of doubt, I know absolutely nothing about investments!

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