Demand spike in France led by Drive and hypers suffering recently
We are positive on the sector
The food retail sector's strong cash flow (c7% avg. Free Cash flow yield), balance sheets (c2.4x gearing), and greater focus on shareholder returns make the sector, we believe, more attractive now. We believe the near-term risks in non-food/wholesale segments are captured in our estimates; we note potential mid-term upside risks from a sustained shift to eating at home and away from discounters. The structural challenges are in the price, in our view: the UK sector is at an 8% discount to the market as the debate is now nuanced. Some markets are better than others in these challenges. Our analysis and UBS Evidence Lab data – geospatial/pricing, consumer surveys/spend trackers – help us identify these nuances, providing a better framework within which to pick stocks.
Three structural themes: UK best positioned; challenges remain in the US
- Discounters: UBS Evidence Lab datapoints to the UK being past the peak of the discounter disruption with maturing competitive incidence from discounters; the position is stable in France and set to increase in the US over the next few years. We assign one point for rising margin risks (US) and three points for falling risks (UK) with two points for neutral risks (France).
- Online: The UK is the most advanced market in our coverage where margin dilution is in the base, while we see dilution persisting in other markets, including the US. Online 2.0 drives greater penetration with better profitability, in our view.
- Retail media Delivering actionable customer data and attributable sales uplift to suppliers helps retailers tap into a c£3bn advertising stream in the UK (US: US$11bn); a profit pool of c£1.5bn.