24 Mar 2014

“FTSE 100 sees supermarket shares shelved as Morrisons wages price war.” Last Thursday week (13 March), shares of William Morrison fell by 12% to 206p. They have fallen by 32% since their 2013 peak of 302p in September. In a show of empathy, Sainsbury’s shares were -8% and -26% from last year’s high and Tesco’s -4% and -23% respectively. The strategic announcement from Morrison has emphasised what we already knew – that discounters like Lidl and Aldi have been winning market share from the “Big 4” supermarkets (the other one, Asda, is a subsidiary of the US giant Walmart). This stock market fallout has delivered some shares that ostensibly now look cheap. As ever, the way to judge is to ask what the valuations tell us about the outlook for the businesses and to decide whether this view is realistic, optimistic or pessimistic. But first, some background. Due to the fact that we all go shopping, my observation is that people tend to overestimate the value of their own opinions about retailers. (This is true of many other topics: house prices, because we all live somewhere; climate chance, because we all notice the weather; healthcare, because we all get ill; bankers, because we all use banks.) On that basis, I must assume the same is true of me. So let’s get my prejudices out of the way. First, Lidl and Aldi are private companies from Germany. In my experience, which is somewhat out of date, shopping in Germany is a grim experience, evocative of Britain in the 1970s. If German retailers compete on scale and price, it is because they have nothing else. It is still the case that the collective German psyche has a horror of inflation (I have a 50 million mark note from the 1920s on my desk) and until 10 years ago, the law regulated prices and shop opening times in a way that suggested that shoppers needed to be protected from greedy retailers. The only Lidl outlet I know (in rural France) usually has just one member of staff on the checkout and the last time I was there (buying Chardonnay at less than €3 a bottle) the customer...