Is this the day of the discount?
THE rise of the discounters has changed the shape of the retail world – but how can investors get a piece of the action, and has the sector peaked? The UK grocery market is worth £175bn and is likely to grow to £203bn over the next five years, says the Institute of Grocery Distribution (IGD).
Households are keen on initiatives by retailers to make their budgets stretch further.
So most analysts believe the drift to thrift is here to stay and the habits adopted by shoppers will remain even when the economy bounces back.
The grocery market’s strongest growth comes from discounters Aldi and Lidl and, at the premium end, from Waitrose.
All are privately owned, so investors can’t buy a stake to share some of the value. But all is not lost – they can gain some upside but in a roundabout way.
In the grocery space, Sainsbury’s has created its own discount brand, Netto. Elsewhere, Poundland, B&M Retail and McColl’s all tap into the trend towards discount and convenience.
SAINSBURY’S/NETTO
A long-term gamble. Sainsbury’s is testing a new discount concept and will open 15 new stores initially. It has yet to decide whether to roll Netto out around the UK to take on Aldi and Lidl, and it only has a 50pc stake in the start-up.
IGD says Netto will differentiate itself through the Scandinavian influence it brings. Famous for its pastries, Netto can leverage its Danish heritage by creating an instore feature of its bakery category. It has been popular in early trading but this has now tailed off so the Christmas period will be key.
The main downside from piling into Sainsbury’s shares is the core business is in the midst of a price war with the discounters and the shares have tanked 39.58pc in 12 months, from 389.10p to 235p.
POUNDLAND
The retail chain that sells items costing just £1 strikes deals with manufacturers who produce smaller, exclusive items. Most people go because items are cheap but end up spending much more than intended. Last month it paid a maiden dividend of 1.5p-a-share.
It has delivered earnings per share of 3.84p, a 41pc increase yearon-year. Net debt was £4.4m meaning, for a former private equityowned firm, it is unusually ungeared. It’s trading at 325.7p-ashare, marginally ahead of its 300p debut and down from a 362p peak. The business seems well run.
B&M RETAIL
This Woolworths- style discount chain sells toys, furniture and food, mainly in the North West. Former Tesco boss Sir Terry Leahy is chairman. It floated at 270p and has nudged up to 277p. Run by the three Arora brothers, who have grown B&M in seven years from 21 discount stores with a turnover of £65m to 300 with a £1bn turnover.
They have already made £380m selling a 60pc stake to private equity. The firm is domiciled in Luxembourg, Leahy’s stake in the firm is held through a fund registered in the tax-friendly Cayman Islands, and B&M has been linked with a UK factory allegedly using immigrants forced to work 80 hours a week for ‘pennies’. The business is only worth an investment if the principals remain committed.
McCOLL’S
James Lancaster, the founder of the newsagent and convenience chain has retail in his blood. He is a McColl’s lifer having set the business up in 1973 and grown it to a chain of 1,276 outlets.
The convenience sector is forecast to grow from £35.6bn in 2013 to £46.2bn in 2018, faster than the overall growth of the UK grocery market. It also represents 21pc of the total UK grocery market. In December Lancaster said underlying fourth-quarter sales were down 1pc but ahead 0.7pc for the year.
The attraction of the firm is the management and its focus on what it has been doing for years.
The shares floated at 191p but have sunk to 183.50p as they find their level.