Watch out M&S - the Germans are coming
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Jody Clarke Aug 21, 2008
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Lidl and Aldi are growing in Europe
After years of advocating free range over battery, and organic over swill fed, it looks like the 'healthier than thou' green movement has had its day. British shoppers have begun trading down.
If you don't believe it, just look at the latest results from Aldi and Lidl, the German discount stores. While other retailers are feeling the squeeze, they're having a stonking year.
According to market research firm TNS, Aldi and Lidl reported year on year annual sales growth of 19.8% and 12.3% respectively in the three months to the middle of August. Meanwhile, food sales at M&S are down 2.1% in the four weeks to August 9th, according to data from Nielsen.
It seems that shoppers don't mind packing their own bags and picking food from cardboard boxes, if it means saving a couple of quid at the end of every month. That means fewer fancy M&S-style pre-packaged meals, and more frozen pizza - sales at Farm Foods, which specialises in frozen food, are up 20.8% in the past three months, while sales at Iceland have risen 14.4%.
"The premium or quality food operators have suffered disproportionately,'' said Nick Bubb, an analyst at Pali International. Discounters meanwhile "did well" over the past four weeks.
But what should investors make of all this? Is this a long-term trend, similar but inverse to the one that saw organic food take up more space on our shop shelves? It all depends on what happens to the wider economy - and at the moment things don't look too bright for the eco-warriors.
The "new discount shoppers are predominantly younger households with children,'' whose budgets are coming under the most pressure, says Ed Garner, director of research at TNS. Many of these people are already facing higher mortgage payments, and are concerned about the security of their jobs. Food inflation at 12% isn't helping either. So they won't be switching to the high-end brands stocked by the likes of M&S and Waitrose any time soon.
So as the economy deteriorates, expect the likes of Aldi to do even better. Unfortunately, as a privately held company, you can't use it as a hedge against the prevailing economic woes. But you could look at the US, where there has been a similar trend to trading down.
Supervalu, one of the largest companies in the US, trades on a p/e of 9.46 and just reported a 9.5% profit in the first fiscal quarter to June 14. However, in common with most other food chains, it is lowering guidance for the end of the year, as higher food prices begin to bite American wallets.
But Ross Stores (Nasdaq:ROST), a chain of discount department stores, is a different matter. It recorded a 40% jump in profits on Wednesday as consumers sought out bargain basement prices on everything from clothes to bed sheets, and "should be able to drive its earnings by 15%-20% a year" according to Mark Montagna, an analyst with CL Kings & Associates in New York. The group currently boasts 900 or so large stores in the US, with plans to expand that to up to 1,500.
It's one to keep an eye on, though we would be looking to buy on the dips. While Montagna says "it's not overbought", the current p/e of 18 seems punchy, and the stock has risen 39% in the past year. Montagna has a price target of $42 on the stock, which currently trades at around $38.
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