Investors’ shopping lists typically include high street retailers. Several are among the largest publicly traded firms in the United Kingdom and have a history of providing dividends to investors through difficult economic times.
M&S, Tesco, and Sainsbury’s have demonstrated resilience for more than a century, surviving everything from the rationing of World War II to the pandemic’s difficulties.
However, as the cost of living continues to rise, the high street titans face a new obstacle. As the price of raw materials, labor, and fuel soars, their expenses are escalating. Simultaneously, their customers are tightening their belts to make ends meet.
There will be winners and losers in this difficult climate. Investors who identify the shops that are best positioned to withstand the cost-of-living problem may be rewarded handsomely, although it may take years for these benefits to manifest.
But if you put the wrong ones in your shopping cart, you could pay a steep price.
Why supermarkets are inconsistent
In recent years, supermarkets have had a more difficult time convincing customers to part with their money. The Office for National Statistics reports that fifty percent of households are purchasing less food as a result of the cost-of-living squeeze (ONS).
Despite this, supermarkets may be more resilient than other types of retailers. In difficult economic circumstances, consumers can reduce their discretionary expenditure, but they will always need to purchase food.
Jason Hollands, managing director of the wealth management firm Bestinvest, believes that food stores may even be able to identify development prospects in the current climate.
“Although shoppers are becoming more discerning about what they place in their shopping carts, food is a need, therefore demand remains rather stable,” he says.
This is advantageous for the bigger chains, as they often make a higher profit margin on their own-label products as more consumers switch from branded to store-brand items.
James de Uphaugh, manager of Liontrust Asset Management’s Edinburgh Investment Trust, adds that the victors in this environment will be those who keep a lid on price increases and provide appealing alternatives for clients who choose to transfer to less expensive brands.
‘Supermarkets were among the heroes of the pandemic,’ he argues, because they kept the nation fed through extraordinarily difficult times marked by ever-changing social restrictions and interrupted international supply lines. Today, you can observe them once again stepping up to the plate.
Those wishing to invest in British supermarkets will find relatively empty shelves. The American private equity firm Clayton, Dubilier & Rice acquired Morrisons last year, whereas Asda, Lidl, and Aldi are privately owned.
However, Tesco, Sainsbury’s, and Marks & Spencer are all listed on the London Stock Exchange, making it simple for UK investors to acquire and sell their shares.
Richard Hunter, head of markets for the financial site Interactive Investor, favors Tesco “comfortably” above the others.
In a famously competitive industry, Tesco is expanding its market share despite rising inflation, he argues.
Tesco is attracting customers with programs like Aldi Price Match, which assures that it would not charge more for certain items than its major bargain competitor Aldi.
Tesco is also retaining customers by offering reduced prices on a variety of everyday items to members of its loyalty program, Clubcard.
In addition, Tesco recently made a show of being on the side of suffering consumers by refusing to carry Heinz baked beans and soups when the manufacturer attempted to hike their pricing. This may also contribute to consumer retention.
Hollands also likes Tesco because it pays investors a decent dividend yield of 4.3% on their shares, or £4.30 every £100 invested per year.
According to Hollands, the chain also owns food wholesaler Booker, which serves businesses across the United Kingdom. This increases operational efficiencies, which aids in reducing expenses.
With the current challenges, rival Sainsbury’s is struggling more. This year, shares have fallen by 23%. The jury is still out on Sainsbury’s near-term prospects, according to Hunter.
Nevertheless, the business has a few bright spots. Instead of passing on wholesale price increases, the company is investing £500 million to absorb them.
This is a positive indication that Sainsbury’s realizes how essential price stability is to its customers.
And the dividend yield is currently a ‘very generous’ 6%, according to Hunter, as Sainsbury’s attempts to persuade shareholders to stick with the company and wait for better times to come.
Sainsbury’s could also be acquired by a private equity group in the same fashion as Morrisons, which would be good news for investors who purchase shares at the current price.
Similarly, Marks & Spencer’s stock price has fallen by 44% so far this year. Mark Wright, manager of the Momentum MultiAsset Value Trust, believes that the food and clothing shop has a chance to do well in the current climate.
‘Cash-strapped consumers may want to conserve money by dining out less, but they still want to indulge in delectable cuisine,’ he says.
According to a recent YouGov survey, M&S clothing is also seen as among the most reasonably priced in the United Kingdom. This could be advantageous in a market where consumers are attempting to stretch their dollars. The dividend yield on M&S shares is a little above 5%.
High street victorious and unsuccessful
According to the ONS, six out of ten households are spending less on non-essentials due to tighter budgets. However, we are reducing expenditures in some categories more than others.
Specifically, consumers are opting not to upgrade their wardrobes, resulting in a decline in clothing spending. As a result, it may be difficult for some time for investors to discover viable opportunities in the clothing retail sector. However, households continue to invest in hobbies, pets, and interior design.
According to Jonathan Pritchard, an analyst at investment bank Peel Hunt, Pets at Home could be a “recession winner” in the retail industry. People will always feed and care for their pets because they view them as family members, he explains. A dog is one of the last things to perish in a recession.
He believes that even if the pet retailer’s growth stalls, it is unlikely to reverse, adding, ‘Shares are down 38% this year, and as a result, they appear to be reasonably priced.’
Pritchard predicts that homewares company Dunelm will be able to withstand the rising demand for cost-effective home improvement products.
“Dunelm provides value to clients and has spent extensively in all of its sales channels, so it is equally happy selling in out-of-town retail stores as online,” he says.
This year, shares have fallen by 44%. Consequently, if you believe in Dunelm’s long-term potential, they may appear to be a bargain.
Currently, only the bold should consider investing in electronics retailers. It is true that individuals still need to replace outdated laptops and enjoy purchasing new phones, especially during difficult economic times.
However, they will likely do so at a slower rate and cling to their old model for a little bit longer.
Even though it recorded solid full-year profits, technology retailer Currys warned last week that the current retail climate was “not very favorable.”
The store has introduced a new Pay Delay program that permits customers to defer payment on products for a year without incurring interest charges.
If successful, it may assist Currys in attracting customers and reviving sales. If it does not, the company may accumulate future debt issues and lower sales. This year, shares have dropped 42%.
Invest in a fund to mitigate risk.
In this context, it is difficult to determine which retailers present the most chances for investors.
Many people may find it preferable to invest in a fund that owns a number of them. Thus, they are not reliant on the fortunes of just one or two merchants, and they have the assistance of a professional fund manager in making investment decisions.
FundCalibre’s senior research analyst, Ryan Lightfoot Aminoff, suggests Time: Commercial Long Income as a possible investment option. Its fortunes depend on the success of supermarkets in which ordinary investors cannot purchase stock.
It has a retail park in Thorne, close to Doncaster, which is home to Aldi, among other retailers. In Gillingham, Kent, it also owns the Asda building.
Kyle Caldwell, a fund specialist at the online investment site Interactive Investor, highlights Supermarket Income Real Estate Investment Trust, which solely invests in supermarket real estate.
He asserts, “It offers a near 5% dividend yield and a solid performance history to date.”
However, shares of the investment trust are trading at a premium of approximately 9 percent due to high demand. Thus, the price of the shares exceeds the value of the trust’s underlying holdings by approximately 9 percent.
Artemis Income is one of several funds that own stock in multiple UK retailers. 3.2% of the fund is contributed by Tesco.
Over the course of three years, the fund has increased from a £1000 investment to £1079.
Edinburgh Investment Trust’s main holdings include Tesco and Dunelm, and it has grown from a £1,000 investment over three years to £1,140.
