Supermarket chains have been around for a long while. And I don’t think they will be disappearing any time soon. During the Covid-19 lockdown, most supermarkets remained open as they were considered to be providing essential goods and services. Both Tesco (LSE:TSCO) and Sainsbury’s (LSE:SBRY) saw a notable increase in grocery sales and their share price as consumers had to prepare food at home rather than eat out. But which one should I add to my portfolio? Let’s take a look.
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The case for Tesco
Founded in 1919, Tesco has become the UK’s largest supermarket chain. It has a 27% market share of the grocery retail industry and is one of the country’s most valuable brands. At the end of 2020, the company had 423,000 employees on its payroll, with a store in almost all major cities across the country.
The company was built with a mission – to be the champion for grocery customers. And to this day, that mission has not changed. This, I feel, could be one of the things that have helped it grow to be the largest supermarket in the UK.
2020 saw the retail free cash flow of the company go down by 29.8%. It also reported a statutory revenue of £57.9bn, which was down by 0.4% from the 2020 report. The companies profit went down by 19.7% compared to its 2020’s report, and it announced a 9.15p dividend per share which was the same figure announced for last year.
The pandemic no doubt have had its toll on Tesco as it has greatly affected the financial performance of the company last year. However, the financial report is still solid in my view. Combined with the effect of the covid-19 and the performance of Tesco in 2020, the share price has remained relatively flat over the last 12 months and is currently trading around 224p.
What about Sainsbury’s?
Sainsbury’s is another major player in the grocery business in the UK, with a smaller but substantial 16% market share. At the end of 2020, total revenue came in at £32.3bn, down by around 0.3% compared to a year before – £28.6bn of which was from grocery retail alone.
Overall, it also delivered a robust operating performance. Its grocery sales were up 7.8%, general merchandise 8.3%, and revenue from its new digital channels up by 104%. The stock yielded a dividend of 10.6p per share in 2020, which remains in line with what it paid in 2019. Sainsbury’s share price now sits around 270p and is up by over 36% in the last 12 months.
Risks to Consider
Every investment comes with its own risk. Both Tesco and Sainsbury are in the same line of business. And therefore are exposed to similar types of hazards. The grocery retail business is a very competitive one. Though they are the largest retail stores in the UK, they face fierce competition from Morrisons, Mark & Spencers, and Asda. All of which are battling for market share. Needless to say, if either of these companies loses dominance even over each other, it could negatively impact Tesco’s and Sainsbury’s share prices.
With the popularity rise of online grocery shopping, the industry is also seeing some disruption by the likes of Ocado. Ocado has long since been an active player in the sector, building up its food delivery service over many years. Consequently, it has a far greater level of expertise versus the largest supermarket chains even though it only captured a small portion of the market. As consumers begin to rely more on these delivery services, Ocado may begin to steal market share away from both Tesco and Sainsbury’s.
Tesco vs Sainsbury’s share price
Tesco and Sainsbury’s together make up 42.3% market share of the grocery business in the United Kingdom. The two grocery retailers are the largest companies in their industry, as well as household names with respective strong management, in my opinion. So which one should I buy?
On a year on year performance, Sainsbury shares have outperformed that of Tesco. But although the Tesco share price performance has been lacklustre of late, it is a bigger company with more resources at its disposal. Moreover, the firm has been investing deeply in technology. This investment into its online retail solutions allowed its profits to surge last year. Hence, in the long run, I believe Tesco will outperform Sainsbury.
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Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.
