The Tesco (LSE:TSCO) share price slumped nearly 9% on 14 March when Asda said it was going to start cutting prices across a large number of its products. It appears to me — as is often the case when news like this first breaks — many shareholders over-reacted.
Some appeared to panic as, in my opinion, irrational behaviour led to the large sell-off in the grocer’s stock. The result? An opportunity for new investors to come on board and acquire shares in, what I believe to be, a quality company at a discounted price.
Well, that’s what I did, anyway.
Going defensive
With the ongoing fallout from President Trump’s erratic approach to tariffs and the associated stock market turmoil, it could be one of the best decisions I’ve made in recent years.
That’s because supermarket shares have a number of characteristics that can make them a good investment during turbulent times. These so-called defensive stocks sell mainly essential items. Although there are no guarantees, it means their earnings and dividends tend to be more stable.
Crucially, Tesco’s unlikely to be affected by any American import taxes.
Market dominance
Impressively, it’s been the UK’s largest grocer since 1995. During this time, it’s coped with many challenges including the arrival of budget chains Lidl and Aldi. These two German budget chains have certainly had a major impact on the market. But looking at data over the past five years, they seem to have damaged Morrisons and Asda more than they have Tesco.
| Share of GB grocery market | 12 weeks to 26.4.20 (%) | 12 weeks to 23.3.25 (%) |
|---|---|---|
| Tesco | 26.7 | 27.9 |
| J Sainsbury | 15.1 | 15.2 |
| Asda | 14.3 | 12.5 |
| Morrisons | 9.9 | 8.5 |
| Aldi | 8.4 | 11.0 |
| Lidl | 5.6 | 7.8 |
| Others | 20.0 | 17.1 |
| Total | 100.0 | 100.0 |
This gives me confidence that the UK’s number one will be able to survive the latest attempt by Asda (and now Co-Op) to knock the group from its top spot. That’s because most people don’t have the time to visit several supermarkets picking the cheapest items from each. As long as the shopping experience is reasonably pleasurable and the groceries are perceived to be fairly priced (not necessarily the cheapest), I think people will keep returning to Tesco.
Also, Lidl and Aldi don’t have an online store.
Impressively, according to a recent survey by YouGov, Tesco’s the most popular supermarket across almost all demographics so it’s clearly doing something right.
The worst could be over
The company’s share price has recovered slightly (1.5%) from its low of the past month. Although this doesn’t sound like much, given the current global turbulence that’s a good result. However, as they say, one swallow doesn’t a summer make. And I’m not too concerned how it performs from one day to the next. Successful investing is all about taking a long-term view.
I’m not oblivious to the challenges that the group faces. Margins are very tight. For the 52 weeks ended 24 February 2024, the group reported an operating profit margin of just 4.1%.
But Tesco’s market share is about the same as that of Sainsbury’s and Asda combined. And I think it’s well placed to continue its dominance. Its European (Hungary, Czech Republic and Slovakia) operations are also doing well. Further expansion here could be one way of increasing earnings.
I’m glad I’ve been able to add Tesco to my Stocks and Shares ISA. Other long-term investors could consider doing the same.
