Christmas is typically seen as a test of our top retailers, and it can provide a good barometer of fortune for our supermarkets. This year’s Yuletide could be a telling one for Tesco (LSE: TSCO), though I fear the tidings might not be good.
Good Housekeeping magazine has just published its annual survey of the cost of Christmas dinner, and it contains good news for feasting revellers — the 11 ingredients are now 10.8% cheaper than they were in 2009. But that’s not such good news for high street names like Tesco, who are facing growing competition and ever-thinner margins.
Relentless competition
This year it’s firmly down to those two interlopers Lidl and Aldi. The Christmas dinner index put Aldi firmly in the lead in the low-cost stakes, with an 8-person meal costing as little as £22.03p — notably cheaper than second-place Lidl at £24.57.
Tesco was squeezed out of third by Iceland, only managing fourth place at £28.08, just ahead of Asda at £29.68.
On its own, this survey perhaps shouldn’t be taken too seriously, but it does make me question the expectations some have for Tesco’s recovery over the next couple of years — analysts are predicting significant EPS growth, but it seems like it’s been “recovery next year” for years now.
And we’d still be looking at a forward P/E of more than 28, dropping only to around 21.5 based on 2018 predictions. I can’t, at this moment, see why Tesco should command a multiple of around twice the FTSE 100‘s long-term average, especially not with dividends still expected to be very low.
Competition hurting too?
Morrisons (LSE: MRW) is another one that could do poorly this Christmas, if the survey is anything to go by. With its dinner costing £31.12, Morrisons only managed a poor sixth place in terms of low cost, with its total price a full 40% more expensive than winner Aldi.
I remember the early days when Morrisons was expanding and capturing market share — and it was doing it by undercutting its rivals. Without a cost advantage, I really couldn’t think of any reason why I’d go there for any Christmas food shopping this year — or why I’d buy the shares.
And while Morrison is also expected to turn its fortunes around this year, we’d still be seeing earnings per share of only around half their pre-crunch levels, with the shares on a P/E of 21.
Most expensive?
At the other end of the list came Marks & Spencer (LSE: MKS) with its reassuringly expensive Christmas dinner at £49.90. I say reassuring, because higher quality food is the one thing that M&S does really well, and it’s going to be bought by shoppers who really don’t mind the cost of putting on a top spread each year.
M&S is struggling in other departments, and has repeatedly shown its inability to turn its clothing business round into growth. That means there’s a further fall in earnings on the cards this year, putting the shares on a P/E ratio of around 11.5. Dividend yields should be about 5.6%, though, albeit with cover that’s perhaps a little stretched.
But you know what? Of these three shares, M&S’s are the ones I’d be most likely to buy now.
And Christmas food shopping? I’ll be heading to a new shopping development half a mile from home that contains only two stores — Aldi and M&S Food.