They are passing costs on to customers, but it may not last long, and explain the rise of Aldi and Lidl
On Tuesday, supermarket chain Aldi replaced Morrisons as the UK’s fourth-biggest seller, and online Ocado fell 12% on the stock market as it warned of rising costs.
Supermarkets are often defensive stocks in a recession. Spending on eating out is cut and more food is bought, allowing retailers to raise sales and even prices. In 2007-09, Tesco, the largest British chain by market share, raised its EBITDA margin to more than 8%. And in the pandemic, chains were able to maintain relatively high margins despite spending more on cleaning.
This crisis looks different. Although food inflation suggests that companies are passing on costs to customers, that may not last as the recession hits. And it may be why Germany’s Aldi and Lidl are expanding rapidly, thanks to their smaller store offerings and global reach, which allows them to offer lower prices. They have a market share of more than 16%, according to Kantar. It surpasses that of J Sainsbury, the second group in the country.
Supermarkets can sacrifice market share and maintain prices, but this will end up weakening them. Or they can try to sell more online, as Aldi and Lidl don’t have that service, but that usually has a lower margin.
Debt is an added complication for Morrisons and Asda. Both were recently purchased on leverage. Since the beginning of the year, Asda’s bonus return for 2026 has doubled, to exceed 9%.
Analysts expect Sainsbury’s and Tesco’s ebitda margin to remain at 7% for two years. But current levels look high: Tesco converted just 5% of its revenue into EBITDA already in 2018. And valuations are far from cheap: including debt, Tesco is worth some 7 times projected 2023 EBITDA, in line with the first half of 2021. But with a bleak outlook and Aldi and Lidl expanding, valuations of the big supermarkets are likely to end up in the discount aisle.
