Tesco (LSE: TSCO), J Sainsbury (LSE: SBRY) and Wm Morrison Supermarkets (LSE: MRW) are down by an average of around 40% in 2014.
These household names are about to fall victim to discount giants Aldi and Lidl — right?
I’m not so sure: things are changing, but I’m not convinced these household names will be the biggest losers.
1. Where does the money go?
Tesco, Sainsbury and Morrisons still have a 58% share of the UK grocery market, and boast combined annual UK sales of more than £90bn.
These three firms also own most of the prime grocery real estate in the UK, along with most of the fast-growing online grocery market.
It’s clear to me that Tesco, Sainsbury and Morrisons should be able to maintain a strong hold on the mainstream grocery market. I think we’ll start to see evidence of this in 2015.
2. Fashions always change
In the run-up to Christmas, we were subjected to a barrage of television advertising featuring smug, affluent people, all marvelling at the cheap food they’ve bought from Aldi and Lidl.
However, although the discounters are cheaper for some items, they still don’t sell everything you need for a full shop, and their car parks are often manic.
I’m also starting to find that I spend longer queuing at my local Aldi and Lidl stores than I do at any of the main supermarkets — after which I have to hurl everything back into my trolley at breakneck speed, in order to bag it up away from the tills.
Shopping at Aldi and Lidl may have become a middle-class fashion — but this could change fast.
3. 2015 could be the turning point
Of course, I’m not trying to suggest that the three big UK supermarkets don’t have problems.
Clearly they do: sales are falling, and so are profits.
What’s more, I expect that Sainsbury and Tesco, if not Morrisons, will have to close some stores, in order to balance the market a little better.
However, you could argue this is all quite healthy: periodically, markets do need to rebalance, and when companies address their problems and explain how they will be fixed, market sentiment tends to improve.
The right time to buy is often when sentiment is at its worst: when everyone agrees on something, it’s usually old news — and about to change.
I believe the UK supermarket sector will be a profitable place to invest over the next couple of years, but there’s no doubt that some risk remains: not all supermarkets will recover equally.