With the number of structural shifts taking place in business today, I believe that in hindsight, this may well look like the age of disruption. I have recently written about the oil and gas industry’s move towards cleaner energy sources and the tobacco industry’s shift towards healthier next-generation products. The retail sector is undergoing a similar shift with the advent of online sales. From apparel to grocery, companies are currently in the process of transition, even if in-store sales are still dominant.
While this change may be global, UK -based companies are bracing for additional Brexit-driven disruption in the near future. At the very least, this will result in some lost growth and this brings me to supermarkets, which I believe are worth exploring right now. This is not so much because they promise to be high-growth stocks, but because the Brexit downside is limited for these consumer defensives. Grocery budgets can be cut only so much, even when a consumer’s discretionary spending takes a hit.
I believe that of the two FTSE 100 grocery retailers – Tesco (LSE: TSCO) and Sainsbury (LSE: SBRY) – the former is more likely to transition into next-generation shopping while managing fluctuating economic conditions way better than the latter. At least that’s the case right now. Here’s why.
Tesco: Improving performance
It’s twice the size of J Sainsbury, which, I believe provides gravity to the company not afforded by smaller operators. Its market capitalisation is an even bigger four times that of its rival. Its financials are also on the mend as pointed out by my colleague Roland Head a few days ago. I also like the fact that its online sales showed 5.1% growth in 2018.
The company also seems to be unfazed by these shaky economic times. In its outlook, it said that not only is it on the path to achieving cost reductions and better operating margins, but it is also improving its debt ratios. I don’t see any reason to doubt its ability to achieve this given the last full-year results.
J Sainsbury: Merger troubles
Sainsbury’s on the other hand has run into trouble with its proposed merger with Walmart-owned Asda. Together the two could give Tesco a run for its money, but the CMA hasn’t givent he deal a green light so far, the regulator citing the likelihood of increased prices as a result of it, which would be to consumers’ detriment.
I do not mean to discount this share completely, especially given its sound financial results in 2018. In fact, its online sales have been rising faster than Tesco’s. However, its unique merger situation makes it hard to foresee the future for the firm. If the merger does happen, it may well turn out well, but do bear in mind that it will take place during potentially tough macro-economic conditions. This means, that in case there are teething troubles or it doesn’t work out at all, there will be no economic cushion. I think there is real risk of some lasting damage here.
At a time of structural changes and with the possibility of a cyclical downturn, stability is currently more desirable than adventure. In other words, I think Tesco is a much better buy than Sainsbury’s.
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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019