High street retailers often feature on investors’ shopping lists. Several are among the biggest listed companies in the UK and have a track record of paying out to investors even in tough times.
The likes of M&S, Tesco and Sainsbury’s have proved resilient for over a century, getting through everything from the rationing of the Second World War to the challenges of the pandemic.
But as the cost of living soars, the high street giants are facing a new challenge. Their costs are rising as the price of raw ingredients, labour and fuel rockets. At the same time their customers are reining in their spending to make ends meet.
Challenging market: The cost-of-living squeeze is forcing shoppers – and retailers – to be creative
In this challenging climate there will be winners and losers. Investors who identify the retailers best placed to weather the cost-of-living crisis may be in for rich rewards, although they may take some time to emerge.
But put the wrong ones in your shopping basket and it could cost you dearly.
Why supermarkets are a mixed bag
Supermarkets are finding it harder to get shoppers to part with their cash than they have for years. Half of all households are buying less food as a result of the cost-of-living crunch, according to the Office for National Statistics (ONS).
Even so, supermarkets may prove more resilient than other types of retailer. Shoppers can cut discretionary spending in tough times, but they will always have to buy food, no matter how expensive it gets.
Jason Hollands, managing director at wealth manager BestInvest, says that food retailers may even spy growth opportunities in this climate.
‘While people are being more careful about what they put in their shopping trolleys, food is an essential item and so demand is relatively consistent,’ he says.
‘As increasing numbers of shoppers switch from branded items to own-label products, this is actually beneficial to the largest chains, as they typically earn a higher profit margin on their own-label products.’
James de Uphaugh, who runs Liontrust Asset Management’s Edinburgh Investment Trust, adds that the winners in this environment will be those who keep a lid on price increases and offer compelling options to customers who want to switch to cheaper brands.
‘Supermarkets were among the heroes of the pandemic – keeping the nation fed through incredibly challenging times, with ever-changing social restrictions and disrupted international supply chains,’ he says. ‘Today you can see them stepping up to the plate once again.’
Investors who want to buy into Britain’s supermarkets will find the cupboards relatively bare. Morrisons was taken over by American private equity group Clayton, Dubilier & Rice last year, while Asda, Lidl and Aldi are privately owned.
However, shares in Tesco, Sainsbury’s and Marks & Spencer are all listed on the London Stock Exchange and are therefore easy for UK investors to buy and sell.
Of these, Tesco is ‘comfortably’ the favourite of Richard Hunter, head of markets at investment platform Interactive Investor.
‘Even amid rising inflation, Tesco is increasing its market share in what is a notoriously competitive industry,’ he says.
Tesco is drawing in shoppers with schemes such as Aldi Price Match, which guarantees that it will not charge more for key items than its major budget rival Aldi.
Tesco is also holding on to its customers by offering lower prices on a range of everyday items to members of its loyalty scheme, Clubcard.
Furthermore, Tesco recently made a show of being on the side of struggling shoppers by refusing to stock Heinz baked beans and soups when the manufacturer tried to raise its prices. This too may help engender 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 businesses across the UK,’ says Hollands. ‘This creates operational efficiencies, which helps to keep costs down.’
Rival Sainsbury’s is struggling more with the current pressures. Shares are down 23 per cent this year. Hunter warns: ‘The jury is currently out on Sainsbury’s immediate prospects.’
However, there are some bright spots for the retailer. It is spending £500million on absorbing wholesale price rises, instead of just passing them on.
This is a good sign that Sainsbury’s understands the pain its customers are feeling and how important price stability is to them.
And the dividend yield is currently at an ‘extremely generous’ 6 per cent, says Hunter, as Sainsbury’s tries to convince shareholders to stick with it and wait for better times ahead.
There is also always a chance that a hungry private equity firm could snap up Sainsbury’s in the same manner as Morrisons, which would be good news for investors who get in at this price.
Shares in Marks & Spencer are also down, 44 per cent so far this year. However, Mark Wright, fund manager of the Momentum MultiAsset Value Trust, believes that the food and clothes retailer stands a chance of performing well in the current environment.
‘Hard-pressed consumers may wish to save money by eating out less, but still want to treat themselves to delicious cuisine,’ he says.
M&S clothes are also perceived as being among the best value in the UK, according to a recent YouGov poll. This could stand it in good stead as shoppers work to make their money go further. M&S shares are yielding just over 5 per cent.
Winners and losers on the high street
Six in ten households are spending less on non-essential items as budgets are squeezed, according to the ONS. However, we are trimming back spending in some categories more than others.
Clothes spending is falling in particular as shoppers choose not to upgrade their wardrobes. As a result it may be hard for investors to find good clothes retailer options for some time. However, households are still splashing out on hobbies, pets and home interiors.
As a result, Pets at Home could be a retail ‘recession winner’, says Jonathan Pritchard, an analyst at investment bank Peel Hunt. ‘People see pets as part of the family and will always ensure they are fed and cared for,’ he says. ‘The dog is one of the last things to go in a downturn.’
He believes that although growth may stall for the pet retailer, it is unlikely to reverse, adding: ‘Shares are down 38 per cent this year and as a result are looking cheap.’
Homeware retailer Dunelm may prove resilient, says Pritchard, as households look for affordable ways to brighten up their homes.
‘Dunelm offers value to customers and has invested heavily in all its sales channels so is as comfortable selling in out-of-town retail stores as it is online,’ he says.
Shares are down 44 per cent this year. So if you believe in Dunelm’s long-term potential, they may look like good value.
Investing in electronics retailers right now is probably only for the brave. It is true that even in tough times, people still need to replace old laptops and like to buy new phones.
However, they are likely to do so at a slower rate – and hold on to their old model that bit 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 to allow customers to put off 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 it doesn’t it may just store up debt problems and lower sales later on. Shares are down 42 per cent this year.
Spread the risk by investing in a fund
Working 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 holds a number of them instead. That way, they are not dependent on the fate of just one or two retailers – and they have the help of an expert fund manager to make the calls.
A fund called Time: Commercial Long Income is one option suggested by Ryan Lightfoot Aminoff, senior research analyst at fund data group FundCalibre. Its fortunes are linked to the success of some of the supermarkets that ordinary investors are unable to buy shares in.
For example, it owns a retail park in Thorne, near Doncaster, which is home to Aldi, among other stores. It also owns the building used by Asda in Gillingham, Kent.
Kyle Caldwell, a fund expert at online investment platform Interactive Investor, highlights Supermarket Income Real Estate Investment Trust, which only invests in supermarket property.
‘It has a near 5 per cent dividend yield and a good performance track record to date,’ he says.
However, the investment trust is in demand and shares are trading at a premium of close to 9 per cent. That means the shares cost nearly 9 per cent more than the value of the trust’s underlying holdings.
Artemis Income is among a number of funds that hold stock in several UK retailers. Tesco makes up 3.2 per cent of the fund.
The fund has turned a £1,000 investment into £1,079 over three years.
Edinburgh Investment Trust has Tesco and Dunelm among its top holdings and has turned a £1,000 investment into £1,140 over three years.
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