Supermarket shares are known for their defensive nature. This is because groceries are seen as consumer staples that have inelastic demand. Although these shares don’t boast mega returns, they do tend to be more insulated from a stock market pullback. As the cost of living crisis continues to run rampant, Tesco (LSE: TSCO) shares are down 10% this year. As such, this could be a buying opportunity for me.
Grocery sales slump
Kantar’s latest grocery figures continue to show that sales are declining at supermarkets. Grocery sales continued to dwindle, dropping a further 4.4% in the 12 weeks to 15 May. Additionally, the average grocery basket is now 7% more expensive than it was last year, up from the 5.4% figure last month. Tesco shares don’t exactly scream ‘buy’ given the pessimistic data.
In fact, more than one in five households now consider themselves as struggling in this high-inflation environment. Within this group, rising groceries prices are a concern to over 90% of them. This makes groceries the second most important issue behind high energy bills. Nevertheless, Tesco could capitalise on this shift in consumer sentiment.
Jubilant month
Amid all the negative statistics, the summer months could help Tesco’s top line, especially with the upcoming Platinum Jubilee holiday.
With a four-day bank holiday weekend on the horizon, we’re expecting people to celebrate with friends and family. Looking back at the Diamond Jubilee in 2012, we saw a 10% boost in supermarket sales during the week leading up to the festivities. We should never underestimate the appetite for a party, especially a royal one.
Source: Fraser McKevitt, Kantar Head of Retail and Consumer Insight
Tesco has managed to buck the trend of many of its peers. It saw its market share grow 0.4% year on year (Y/Y) to 27.4% while many of its other competitors lose out. Moreover, the FTSE 100 firm saw the smallest decline in sales among its two biggest peers, Sainsbury’s and Asda. This could be a result of Tesco’s Aldi price match campaign, as its change in sales outperformed the industry average.
| Retailer | Sales 12 Weeks to 16/5/2021 (£m) | Market Share (2021) | Sales 12 Weeks to 15/5/2022 (£m) | Market Share (2022) | Change in Sales (Y/Y) |
|---|---|---|---|---|---|
| Total Grocers | 31,296 | 100.0% | 29,912 | 100.0% | -4.4% |
| Tesco | 8,457 | 27.0% | 8,195 | 27.4% | -4.3% |
| Sainsbury’s | 4,733 | 15.1% | 4,418 | 14.8% | -6.7% |
| Asda | 4,519 | 14.4% | 4,124 | 13.8% | -8.7% |
| Aldi | 2,545 | 8.1% | 2,691 | 9.0% | 5.8% |
| Lidl | 1,936 | 6.2% | 2,052 | 6.9% | 6.0% |
It should also be noted that the UK government recently unveiled a range of measures to combat the cost of living crisis. It’s offering a £650 one-off payment to support the UK’s most vulnerable households among other measures. Consequently, this could ease the decline in supermarket sales.
Good deal?
Is the current Tesco share price a good deal then? Its shares are trading at a price-to-earnings (P/E) ratio of 13, making it slightly cheaper than the FTSE 100’s average of 15. The Tesco stock also has a dividend yield of roughly 4%, which could hedge against a slight decline in its share price. And as the largest supermarket in the UK, I feel that Tesco shares could possibly be the best supermarket stock for me to own.
Nonetheless, I do have a couple of reservations as the retailer still faces tough competition. Sainsbury’s recently committed £500m to lower its prices alongside Tesco, while its German counterparts continue to capture more market share. Furthermore, the trickle-down effect of government relief may not be as impactful as many expect it to be, only bringing a possible temporary relief to the Tesco share price.
So, even though Tesco has plenty of merits as a defensive stock, I don’t see its share price rebounding by a substantial amount given the intense competition and macroeconomic headwinds. Therefore, I won’t be buying Tesco shares any time soon. Instead, I’ll be looking to purchase other shares that could benefit from a potential stock market crash.