High street retailers are often on investors’ shopping lists. Several are among the largest publicly traded companies in the UK and have a track record of paying out to investors even in difficult times.
Companies like M&S, Tesco and Sainsbury’s have been resilient for over a century and have endured everything from the rationing of World War II to the challenges of the pandemic.
But with the cost of living rising, the retail chains are facing a new challenge. Their costs rise as the price of raw materials, labor and fuel skyrocket. At the same time, their customers are limiting their spending to make ends meet.
Challenging market: Cost of living tightness is forcing shoppers – and retailers – to get creative
In this challenging environment there will be winners and losers. Investors who identify the retailers best placed to weather the cost of living crisis can expect big rewards, although they may take some time to emerge.
But put the wrong one in your shopping cart and it can cost you dearly.
Why supermarkets are a mixed bag
Supermarkets are finding it harder to part with shoppers of their money than they have in years. According to the Office for National Statistics (ONS), half of all households buy less food due to the cost of living.
Still, supermarkets may prove to be more resilient than other types of retailers. Shoppers can cut back on discretionary spending during tough times, but they will always have to buy food no matter how expensive it gets.
Jason Hollands, director of asset manager BestInvest, says food retailers can even spy on growth opportunities in this climate.
“While people are more careful about what they put in their shopping carts, food is an essential item and so demand is relatively constant,” he says.
“As more shoppers move from branded to private label products, this is beneficial for the largest chains, as they typically earn a higher profit margin on their private label products.”
James de Uphaugh, who heads Liontrust Asset Management’s Edinburgh Investment Trust, adds that the winners in this environment are those who control price increases and offer attractive options to customers who want to switch to lower-cost brands.
“Supermarkets have been among the heroes of the pandemic – keeping the country fueled through incredibly challenging times, with ever-changing social constraints and disrupted international supply chains,” he says. “Today you see them stepping on the board again.”
Investors who want to buy into British supermarkets will find the cabinets relatively bare. Morrisons was acquired last year by US private equity group Clayton, Dubilier & Rice, while Asda, Lidl and Aldi are privately owned.
Shares in Tesco, Sainsbury’s and Marks & Spencer are, however, all listed on the London Stock Exchange and are therefore easy for UK investors to buy and sell.
Of these, Tesco is ‘comfortably’ the favorite of Richard Hunter, head of markets at investment platform Interactive Investor.
“Even amid rising inflation, Tesco is increasing its market share in a notoriously competitive industry,” he says.
Tesco attracts customers with programs like Aldi Price Match, which guarantees it won’t charge more for key items than its big budget rival Aldi.
Tesco also retains its customers by offering members of its Clubcard loyalty program lower prices on a range of everyday items.
In addition, Tesco recently showed that it is on the side of struggling shoppers by refusing to stock Heinz beans and soups as the manufacturer tried to raise its prices. This can also contribute to customer loyalty.
Hollands also likes Tesco as it currently offers investors a reasonable dividend income of 4.3 per cent on their shares, or £4.30 a year for every £100 invested.
‘The chain also owns food wholesaler Booker, which supplies companies throughout the United Kingdom,’ says Hollands. “This ensures operational efficiency, which helps to keep costs down.”
Rival Sainsbury’s struggles more with the current pressure. Shares are down 23 percent this year. Hunter warns, “The jury is out right now on Sainsbury’s immediate prospects.”
However, there are some bright spots for the retailer. It spends £500m absorbing wholesale price increases, rather than just passing them on.
This is a good sign that Sainsbury’s understands the pain its customers feel and how important price stability is to them.
And the dividend yield is currently at an “extremely generous” 6 percent, Hunter says, as Sainsbury’s tries to convince shareholders to stick with it and wait for better times.
There’s also always a chance that a hungry private equity firm could capture Sainsbury’s the same way Morrisons did, which would be good news for investors entering at this price.
Shares in Marks & Spencer have also fallen, 44 percent so far this year. However, Mark Wright, fund manager of the Momentum MultiAsset Value Trust, believes the food and apparel retailer has an opportunity to perform well in the current environment.
“Striking consumers may want to save money by eating out less, but still want to treat themselves to delicious cuisine,” he says.
According to a recent YouGov survey, M&S clothing is also seen as some of the best value in the UK. This could come in handy as shoppers work to get their money going further. M&S stocks yield just over 5 percent.
Winners and losers in the shopping street
According to the ONS, six in ten households spend less on non-essential items because budgets are under pressure. However, we are cutting back in some categories more than others.
In particular, clothing spending is declining as shoppers choose not to upgrade their wardrobes. As a result, it can be difficult for investors to find good clothing store options for some time. However, households are still busy with hobbies, pets and interiors.
As a result, Pets at Home could be a “recession winner” in retail, said Jonathan Pritchard, an analyst at investment bank Peel Hunt. “People see pets as part of the family and will always make sure they are fed and cared for,” he says. “The dog is one of the last things to go in a recession.”
He believes that while the pet store’s growth may be stalling, it’s unlikely to reverse, adding: “Stocks are down 38 percent this year and look cheap as a result.”
Homeware retailer Dunelm may prove resilient, Pritchard says, as households look for affordable ways to brighten up their homes.
“Dunelm offers value to customers and has invested heavily in all of its sales channels, so selling in out-of-town stores is just as easy as it is online,” he says.
Shares are down 44 percent this year. So if you believe in Dunelm’s long-term potential, they may seem like good value.
Investing in electronics stores right now is probably only for the brave. It is true that even in difficult times people still have to replace old laptops and love to buy new phones.
However, they will likely do this at a slower pace – and stick with their old model for a little longer.
Technology retailer Currys warned last week that the current retail environment was “not very friendly,” even though it posted strong full-year results.
The retailer has launched a new Pay Delay scheme that allows customers to delay paying for purchases for a year without paying interest.
If it works, it could help Currys get customers through the door and rejuvenate sales. If not, it can only lead to debt problems later on and sales drop. Shares are down 42 percent this year.
Spread the risk by investing in a fund
Figuring out which retailers offer the best opportunities to investors is a tough challenge in this climate.
Many investors may prefer to invest in a fund that has a number of them. That way, they’re not dependent on the fate of just one or two retailers — and have the help of an expert fund manager to make the calls.
A fund called Time: Commercial Long Income is an option suggested by Ryan Lightfoot Aminoff, senior research analyst at fund data group FundCalibre. His fortune is linked to the success of some of the supermarkets that ordinary investors cannot buy shares in.
For example, it owns a retail park in Thorne, near Doncaster, where Aldi is located, among others. It also owns the building used by Asda in Gillingham, Kent.
Kyle Caldwell, a fund expert at the online investment platform Interactive Investor, highlights Supermarket Income Real Estate Investment Trust, which invests only in supermarket real estate.
“It has a dividend yield of almost 5 percent and a good track record to date,” he says.
However, the investment trust is in demand and the stock is trading at a nearly 9 percent premium. That means the shares cost nearly 9 percent more than the value of the trust’s underlying interests.
Artemis Income is one of a number of funds that hold shares in several UK retailers. Tesco makes up 3.2 percent of the fund.
The fund has converted an investment of £1,000 into £1,079 over three years.
Edinburgh Investment Trust has Tesco and Dunelm among its top positions, turning an investment from £1,000 into £1,140 in three years.
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