1. UK Grocery Retail Sector Market Landscape

The food sector is very diverse with a large value chain, including food growers, food processors and food retailers. The food or grocery retail can broadly be classified under supermarkets, discounters, internet or online shopping, click & collect and convenience stores. The demand for ethnic, healthy and convenient food has grown over the last few years.

The global food & grocery retail market was valued around USD 13.98 trillion in 2020, and it is expected to grow at a CAGR of about 5.0% between 2020 and 2027. The revenue of the food and grocery market is expected to reach USD 17.30 trillion by 2027. The Institute of Grocery Distribution (IGD) expects that the UK grocery market will be worth £217.7 billion in 2024. The food retail sector of the UK remains very competitive due to the dominance of some of the big brands that continuously put effort to provide discounts and lower prices to gain the market share. 

The UK has been the trendsetter for how grocery is done as it was the first country to launch click & collect and online shopping methods. It has some of the leading supermarket chains, and grocery shopping is very dominant in the retail sector. The pandemic has affected different sectors in varied capacity. The shopping pattern of the people changed, and an increase in basket size and shelf storage supported the grocery sector. The customers moved back to large shops and opted for online shopping.

Take-home grocery sales in the UK saw growth at the fastest rate since records began in 1994 as the pandemic swept in March 2020. Some of the factors that have influenced the shopping habit of the people after the pandemic hit the world are proximity, cleanliness, and crowds.

Food Stores Data for November 2020

In November 2020, the food sales increased by 7.1% year on year, and the volume sales of food stores grew by 3.1% month on month in November, and it was up by 6.8% as compared to February 2020. The food sales in November were boosted by the restrictions on the hospitality sector and changing consumer habits. The click & collect users boosted the sales of grocery. The food store was the only sector to see an increase in monthly spending in November 2020. The online and in-store sales increased in November as the food sector was exempted from the lockdown restrictions. The in-store and online sales increased by 2.9% and 1.5%, respectively, month on month in November 2020. 

Key Trends in the Grocery Retail Sector

• New Technology – The disruptive technological innovation in the retail sector has allowed the stores to provide services that have improved the shopping experience, including sophisticated shopping options such as home delivery services and one-click shopping. The technology has also helped the retailers to provide better pricing and improving ordering functionality. Artificial Intelligence is supporting subscription purchasing models and automated ordering.
• Changing Consumer Preference – The preference of the consumers is also changing as they are opting for more personalized products, and they have shifted to online shopping. The customer’s need is the top priority of the stores, and they are putting all the efforts to make the shopping experience more personalized and hassle-free. The customer preference has also changed as they have switched from shopping from many small suppliers to centralized distribution hubs.
• Industry Consolidation – The retail sector has become highly competitive, and in order to gain the market share and secure future growth, there has been consolidation in the retail sector. The factors such as improving operational efficiency and streamlining logistics will support the consolidation in the sector.

Risk Exposures to the Grocery Retail Sector

• Customer Retention – The uncertainties can reduce the budget of the customers, and it can force them to reappraise the concepts of value and loyalty that can affect the retention of the customers. The events such as the pandemic and Brexit can have an enormous impact on customer retention.
• Competition and Markets – The failure of strategy and ineffectiveness to respond to changing market conditions can result in loss of market share, and it can also lead to lower profitability.
• Technology – Any failure in IT infrastructure or loss of data can affect the operations. A data breach can lead to penalties, and it can also result in reputational damage.
• Sourcing & Supply Chain – If the products are not sourced properly, and there is some hindrance in the supply chains, it will affect the business continuity. If the standard and quality of the product is not up to the mark, it can lead to loss of customers.

Benchmark Index Performance

Based on the 1-Year performance, the FTSE All Share Food & Drug Retailers index has generated a positive return of around +12.47% and has outperformed the FTSE 100, FTSE 250, and FTSE All-Share indices with price return of nearly -9.41%, -5.69%, and -7.96%, respectively.

Fig 3: One Year Benchmark Index Performance

 (Source: Refinitiv, chart created by Kalkine Group)

SWOT Analysis

Grocery Retail Sector Outlook

The pandemic has changed the consumer preference, and shopping habits as the basket size in the supermarkets increased, and people went on a grocery shopping spree. The grocery sales in 2020 have gone up, and sales at independent supermarkets were up 63 percent in the 12 weeks to May 17, 2020, with the sector reaching a market share of 2.5 percent, the biggest since 2009.

The Institute of Grocery Distribution (IGD) expects that the UK grocery market will be worth £217.7 billion in 2024. The online shopping in the UK is expected to increase by 41% over the next five years. The convenience stores will be among the fastest-growing sectors ,and the sales are likely to increase from £41.4 billion in 2019 to £48.2 billion by 2024. The discounters will be worth around £34.3 billion by 2024, whereas the click & collect sales will also continue to grow.

The online grocery market is expected to be valued around £16.8 billion in 2020, which will grow from £12.7 billion in 2019. The demand for discounters and online shopping has grown tremendously over the last few years in the UK. The outlook for superstores and hypermarkets is also positive as the increase in investment would drive the growth.

2. Investment analysis and stocks under discussion (TATE, GNC, CAM, SBRY)

After gaining insights into the Grocery sector, we would look at the business model of four Grocery players listed on the London Stock Exchange.

A. Tate & Lyle PLC (LON:TATE)

(Recommendation: Buy, Potential Upside: 20.56%, Market Capitalization: GBP 3.12 billion)

Tate & Lyle is a UK based provider of food and beverages ingredients and solutions. The reportable business segments include Speciality Food Ingredients and Bulk Ingredients. It is listed on the FTSE-250 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of 20.56% over the closing price of GBX 663.40 (as on 19 January 2021).

B. Greencore Group PLC (LON: GNC)

(Recommendation: Speculative Buy, Potential Upside: 14.20%, Market Capitalization: GBP 589.70 million)

Greencore Group is the UK based manufacturer of convenience food. The Company has total 16 manufacturing sites in the UK. GNC is listed on the FTSE-250 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of 14.20% over the closing price of GBX 115.00 (as on 19 January 2021).

C. Camellia PLC (LON: CAM)

(Recommendation: Speculative Buy, Potential Upside: 34.88%, Market Capitalization: GBP 203.70 million)

Camellia is a UK based company that is engaged in agriculture, food and engineering services. The Company is listed on the FTSE AIM All-Share index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of 34.88% over the closing price of GBX 7,550.00 (as on 19 January 2021).

D. J Sainsbury PLC (LON: SBRY)

(Recommendation: Hold, Potential Upside: 9.37%, Market Capitalization: GBP 5.31 billion)

J Sainsbury is a leading UK-based retailer of food, clothing and general merchandise selling over 90,000 products and currently has over 185,000 employers across the UK and Ireland. The Company is listed on the FTSE-100 index. 

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of 9.37% over the closing price of GBX 238.20 (as on 19 January 2021).

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

*All forecasted data and peer information have been taken from Refinitiv, Thomson Reuters.

*The "Buy/Speculative Buy" recommendation is also valid for the current price as covered in the report as on 20 January 2021.

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