7:57 AM 15th January 2022
Market Analysis: M&S And Sainsbury's
Ross Hindle, Analyst at Third Bridge
reports on two retailers this week:
"M&S has served up a piping hot performance with total UK sales strongly beating consensus estimates.
"A resurgent M&S was Britain's fastest-growing retailer over the Christmas quarter, a big beneficiary of Britain's appetite for at-home luxury as consumers sought to make the best of another Covid Christmas.
"Back in 2020 M&S was struggling to find its mojo, however, a well-executed restructuring has seen the Group outperform peers over the past 12 months. Fresher fashion labels, an improved website, and a more modern store environment are all building momentum, however it is the Group’s partnership with Ocado that continues to shine bright.
"The M&S and Ocado partnership has been a fruitful one for both parties with M&S products now accounting for nearly 30% of the Ocado basket. We expect this partnership to continue to blossom and our experts cannot foresee the rumours of a total buy-out by M&S materialising.
Despite the positive performance, M&S is still plagued by structural challenges, especially in its Clothing & 1Home division. To complete its resurgence M&S needs to slim down its bloated clothing ranges, trim its high SKU count, and resolve its non-premium store locations."
As for Sainsbury's Ross Hindle says:
"The UK supermarket landscape is attractive to private equity investors and should remain so during the whole of 2022. However, unlike Morrisons, Sainsbury’s remains a complex target. The group is not vertically integrated, does not boast an impressive property portfolio, and is currently faced with some market share risk from both the discount and rapid-delivery sector of the market."
"Food inflation is expected to continue to outpace cost inflation and could ultimately result in higher operating margins for the industry as a whole. However pricing and market share remains a balancing act, with Sainsbury's contending with not just cost pressures but a highly competitive jobs market and pressure from the rapid-delivery players.
"Despite many expecting the Discounters to flourish in the face of food inflation pressures, our experts don't expect Sainsbury’s to be easily caught out. Demonstrating its readiness, Sainsbury’s is already promoting its Aldi price match offer on c.150 items and it is expected the innovation around value to continue in the current inflationary environment.
"December’s trading was particularly strong for UK supermarkets, with home working translating into home eating and fewer consumers dining out as Omicron swept the country. There is now plenty of evidence to suggest the UK’s grocery renaissance is here to stay. Sainsbury’s should be able to hold on to its gains thanks to its loyal customer base and innovation around product lines, however it would be remiss not to highlight the threat the discounters and rapid-delivery grocers pose, particularly to Sainsbury's.
"Sainsbury’s Q3 total retail like-for-like (LFL) sales (ex-fuel/ex-VAT) fell 4.5% y/y. However, investments into value and new products saw the Group gain market share during the quarter.
Third Bridge is a global primary research firm that interviews more than 6,000 internationally recognised industry experts and business leaders a year to compile 360-degree market intelligence for institutional investors. www.thirdbridge.com