When I compare the Tesco (LSE: TSCO) share price to its UK supermarket peers, it’s actually doing relatively well. Notwithstanding the fact that its 10% down, its competitors are faring much worse. With a higher price-to-earnings (P/E) ratio of 13, Tesco shares may not necessarily scream bargain. Nonetheless, there are positives that warrant a closer at its stock.
As cheap as a meal deal?
For one, Tesco remains the market leader. It boasts more than a quarter of the industry’s market share. This is impressive considering the saturated market in which it operates. Secondly, the most recent Kantar grocery report shows that the grocer managed to grow its market share by 0.2% on a year-on-year (Y/Y) basis, in the 12 weeks to 12 June. More importantly, despite its sales figures taking a 1.1% hit, Tesco still managed to outperform all of its peers, bar Aldi and Lidl.
| Retailer | Sales 12 Weeks to 13/6/2021 (£m) | Market Share (2021) | Sales 12 Weeks to 12/6/2022 (£m) | Market Share (2022) | Change in Sales (YoY) |
|---|---|---|---|---|---|
| Total Grocers | 30,760 | 100.0% | 30,189 | 100.0% | -1.9% |
| Tesco | 8,344 | 27.1% | 8,249 | 27.3% | -1.1% |
| Sainsbury’s | 4,655 | 15.2% | 4,483 | 14.9% | -3.9% |
| Asda | 4,330 | 14.1% | 4,121 | 13.7% | -4.8% |
| Aldi | 2,507 | 8.2% | 2,705 | 9.0% | 7.9% |
| Lidl | 1,891 | 6.1% | 2,071 | 6.9% | 9.5% |
Tesco’s strength can be attributed to two key reasons, I feel. The first is the success of its Clubcard programme, which encourages repeat purchases through lower prices. The second is the expansion of its bargain line. In its latest Q1 trading update, management mentioned the expansion of its Everyday Low Prices and Aldi Price Match products by 19% (Y/Y).
Tesco can’t ketchup with prices
Kraft Heinz and Tesco can’t seem to agree on how to price its Heinz products. The American company argues that skyrocketing cost has made production more expensive, hence the price increases. But the retailer says that it won’t pass on what it says are unjustifiable price increases to its customers.
As a result, Tesco has stopped stocking Heinz products for the time being. This is in line with trying to keep costs low for consumers while still making a profit. While talks between the two giants are ongoing, some Heinz products have already been made unavailable online. Nevertheless, this isn’t a unique incident. In 2016, Unilever increased its prices too, which resulted in the removal of Marmite, PG Tips, and Pot Noodle from Tesco’s website.
So, will this impact the retailer’s overall sales figures? Well, due to the cost-of-living crisis, management stated that customers are beginning to purchase more own-brands. So, I don’t expect the temporary unavailability of Heinz products to be detrimental, despite many of its products being staples. Having said that, I’ll be monitoring the situation closely, as further disruptions with other suppliers could negatively impact the firm’s top and bottom lines.
Buying back stock
Despite all that, Tesco is in line to achieve the guidance it set out for itself. Additionally, the company decided to put its £750m share buyback programme into effect yesterday. This shows confidence that the current Tesco share price is undervalued.
Taking everything into consideration, I think the shares are reasonably priced, but not a bargain. I’m not a big fan of its slim profit margins (2.5%) that are expected to decline for the foreseeable future, and I don’t see a huge amount of growth in its top line. As such, I won’t be buying Tesco shares for the time being. Instead, I’ll be looking to buy shares that are more resistant to the impact of inflation.
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More reading
- Should investors buy these dividend-paying FTSE 100 shares this July?
- The Tesco share price is down over 10%. Is it time to buy?
- Is the Tesco share price a bargain at current levels?
- Why Tesco shares could be a bargain hiding in plain sight
- Should I buy Tesco shares at 250p?
John Choong has no position in any of the shares mentioned. The Motley Fool UK has recommended Sainsbury (J), Tesco, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
