Supermarket shares hit 11-year low in sector slump

The fall in Sainsbury’s fortunes is showing a more fundamental problem in the supermarket sector

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The Independent Online

The supermarket sector is in tatters after the three largest listed grocers’ shares all hit decade lows and analysts warned that the sector was “uninvestable”.

Sainsbury’s sank 7 per cent to 234p – an 11-year low; Tesco fell 3.2 per cent to 180.2p – an 11-year low; and Morrisons dropped 5 per cent to 159.9p – a 14-year low.

The fall came as Sainsbury’s admitted its sales are unlikely to rise this year for the first time in 10 years, while Tesco said the Financial Conduct Authority had started a formal investigation into a £250m accounting black hole.

Mike Coupe, Sainsbury’s chief executive, revealed he would be conducting a review of the supermarket he inherited earlier this year from former boss Justin King, with investors fearing a possible dividend cut is on the cards.

In the past three months sales at the UK’s third biggest supermarket dropped 2.8 per cent on a like-for-like basis. Growing sales in convenience stores and online, up 17 per cent and 7 per cent respectively, helped offset drops of between 3 per cent and 4 per cent in its larger stores where most sales come from.

Mr Coupe said: “There is a reality in our marketplace which shows discounters will grow and we need to respond to that.” However, he suggested any response will initially be muted, warning that total sales are likely to stay flat for the whole year.

Throughout the recession Sainsbury’s managed to avoid the exodus of customers to discounters Aldi and Lidl which Tesco, Asda and Morrisons suffered. However, now, Mr Coupe added: “We have a perfect storm – the effect of customers shopping around, we’ve seen deflation in the market for the first time in a generation and we are beginning to see customers eating out again, which is a post-recessionary effect.”

But analysts suggested the fall in Sainsbury’s fortunes is showing a more fundamental problem in the supermarket sector, which investors had once seen as a safe haven for their cash.

Clive Black, a retail analyst at Shore Capital, said: “Supermarkets used to be described as defensive but the economics of the sector make it uninvestable. If you look at the last 10 to 15 years the supermarkets have joined a less than salubrious club. You used to be able to rely on banks, oil companies and supermarkets for [dividend] income. Now they’ve all imploded.

“You’ve got a sector which is in trouble… When there is a low level of confidence and inability to say we’ve reached the bottom, it leaves things very uncertain.”

He also suggested the reason for Sainsbury’s share price fall could be due to investor fear of a dividend cut.

At Tesco the accounting scandal took a new turn with the FCA launching a full investigation. It comes as Deloitte continues its own review and is trawling through emails sent by buyers at Tesco’s head office. Parliament’s Business Select Committee is also considering an investigation into supplier-retailer relationships, and accountancy watchdog the Financial Regulatory Council is also watching with interest.