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Everythng must go in Goldman's supermarket sweep

Last updated: 06:54 14 Nov 2013 EST, First published: 07:54 14 Nov 2013 EST

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It’s time to clear the shelves of supermarket shares says US broker Goldman Sachs, which today added Tesco to its existing ‘sell’ ratings on Sainsbury’s and Morrisons.

The US broker has analysed the growth of online and no-frills, discount competitors and sees few avenues for the trio and also fellow big four grocer Asda to respond to the new entrants. 

“The discounters and online are disruptive channels in UK grocery. We expect their growth to continue and believe that by 2017 around 22% of the UK grocery market will be served by these two channels collectively, up from 15% in 2012.”

Choices facing the big four are limited to cutting prices to try and protect market share or enduring a continuation of market share losses and negative store sales densities.

“In both scenarios operating margin decline is likely in our view,” said Goldman. Accepting share losses to the discounters could result in industry margin falling by 190 bp (1.9 percentage points) to 7.5% by 2017, it calculates.

Goldman already had a sell (conviction) rating on J Sainsbury (LON:SBRY) and Wm Morrison (LON:MRW) and by downgrading Tesco (LON:TSCO) from 'neutral' today completed the set.

The broker estimates the UK’s number one grocer has already lost 1% market share since 2010 and though its capital discipline has improved, it will still be some time before either special divindeds or a buyback programme can be considered. The 12-month price target is 322p.

Concerns over Sainsbury’s include its cash generation, capital discipline and debt levels, while Goldmans adds the supermarket will not be able to avoid pressures from the rise of the online and discount alternatives. The price target is 280p.

Morrisons continues to invest in convenience stores and its partnership with Ocado enable it grow online sales following launch in January 2014. Goldman has also increased its share price target to 265p from 250p, but the current share price does not reflect the margin risk to Morrisons in the short term.

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