UK Supermarkets Underperform, But Some May Benefit

UK supermarkets face increasingly challenging conditions as the country stumbles into stagflation, but diversity could leave certain grocers in a better position.

The Dip or the Peak

Generally, major UK grocery retailers have declined this month, with most of the losses occurring in the aftermath of the BOE's decision to cut interest rates. Investors appear to have interpreted the bank's decision, coupled with the poor GDP report in September, as a signal of an increased inflation outlook. With wage growth continuing to fall, British consumers will likely feel the pinch on both ends, potentially making them less willing to purchase higher-margin items at their local grocery stores.

However, not all UK supermarkets are affected equally, and the economic challenges exacerbate the differences. Since the beginning of the year, Marks & Spencer's stock price has risen 44%, while Ocado has fallen by 46%. The larger chains, Tesco and Sainsbury, have seen more moderate changes, with Tesco up 16% and Sainsbury down 14%, respectively. The performance of grocers during periods of high inflation follows a similar pattern under the new government. The generally higher-end clientele that M&S attracts helps it to insulate from the effects of higher prices, while Tesco's reputation for bargain prices helps it fend off competition from the incursion of German budget chains.​

An Opportunity for Recovery

The decline in the average performance of UK grocers is primarily driven by Sainsbury's and Ocado losing favour among investors while M&S maintains its ground. This suggests that a general trend for UK grocers is unlikely to determine the situation of M&S and Tesco, as they are not experiencing declines. However, the question remains whether Sainsbury's and Ocado can reverse recent declines, though this might be challenging as supermarkets are not expected to provide updates until after the holidays.

Following Sainsbury's earnings release, CEO Simon Roberts expressed concern about the environment, saying that the UK Budget will increase inflation in the country. However, he remained optimistic about his own firm, citing a 2.3% increase in revenues in the last quarter, boosted by its premium range. This could spotlight which supermarkets might emerge as winners, as they have warned that Chancellor Rachel Reeves' new fiscal policy will raise retail costs by £7 billion.

Higher-end consumers have remained resilient through the last couple of years of price growth, which could position M&S to outperform other supermarkets once again. When consumers feel inflation pressure, they typically focus on essentials such as food with lower margins. The fact that M&S's clothing line has proven to be such a success that it will pay a dividend for the first time since 2019 suggests that it might be uniquely positioned ahead of what could be challenging times for UK consumers.​

M&S Pulling Back, For Now

M&S peaked at 400 pence per share earlier in November, forming a double-top pattern. This suggests the stock may pull back towards the round support of 350 and the low of 315 pence, with a break below triggering a potential downside at 260 and 230 pence. Conversely, if prices surpass the recent peak, the pullback may form the handle of a larger cap-and-handle (C&H) pattern, pending a potential upside projection of 725 based on the depth of the 400 to 75 decline. Long-term interim resistance levels to watch on the upside include the May 2015 high of 560 pence and the all-time high of 710 pence reached in 2007.​

Source: SpreadEX / Marks and Spencer Group

Key Takeaways

UK supermarkets face challenging conditions due to rising inflation and stagnant wage growth. However, some retailers are better positioned than others, with M&S's higher-end clientele and successful clothing line insulating it from the effects of higher prices. Tesco's reputation for bargain prices has also helped it fend off competition from budget chains. The decline in the average performance of UK grocers appears to be primarily driven by Sainsbury's and Ocado. While M&S and Tesco have both maintained their ground, M&S may outperform in challenging times for UK consumers as it is expected to pay dividends for the first time since 2019.