Investors see value in Europe's grocery stocks

LONDON • Though battered by concerns over the threat posed by Amazon.com and discount competitors, Europe's grocery stocks are finding favour with some investors on hopes for a better 2018.

While increasing competition is a worry, changes to buying relationships with suppliers should help ease margin and price pressure going forward, according to Mr Ian Ormiston, a European equity fund manager at Old Mutual Global Investors, whose European Equity (ex-UK) Fund holds both Ahold Delhaize and Carrefour.

"This is a sector that's too far out of favour," he said. "It's been an absolute darling of short sellers and it has delivered well for them because it's been a horrendous environment for supermarket groups."

Ahold Delhaize's 25 per cent slide in the first eight months of this year has subsequently been pared to 7.4 per cent, causing investors to ask whether the stock still provides value. Sanford C. Bernstein analyst Bruno Monteyne thinks so, arguing that Amazon's US$13.7 billion (S$18.4 billion) purchase of Whole Foods Market is unlikely to measurably impact sales and profits at the Netherlands-based company.

The grocer's "very solid" cash generation and €2 billion buyback next year mean it is likely to be a winner in 2018, said Mr Monteyne, who has an outperform recommendation on the stock.

Mr Ormiston sees discounters Aldi and Lidl as posing a bigger threat than Amazon. "In many other sectors, people are quite right to fear Amazon because of price deflation, because they are more efficient because of their buying power," he said. "I don't think their game in food, if we look at what they bought, is about price."

That view is echoed by Mr Charles Burbeck, a deputy portfolio manager at UBS Asset Management (UK) in London. He sees food retailers with physical stores being less susceptible to online competition, and plans to increase his exposure to the supermarket sector in the UBS Global Equity Long Short Fund.

"People are concerned that what Amazon has done to books and other parts of the retail sector, they're going to do to the food retailing sector," he said. "Selling vegetables and peas and quiches is very different from selling books in terms of the supply distribution chain."

Mr Ormiston said that, meanwhile, supplier partnerships such as Carrefour's purchasing agreement with Fnac Darty, will help ease pricing pressures and may also lead to a more efficient allocation of physical retail space longer-term.

Even after a 24 per cent drop this year, Carrefour is not for everyone.

Mr Monteyne said that the potential implementation of a big cost-cutting programme would be a bad idea because the French retailer is still losing volume and large amounts of market share.

"Cutting costs while volumes are still declining risks going into a negative spiral," he said.

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A version of this article appeared in the print edition of The Straits Times on December 21, 2017, with the headline 'Investors see value in Europe's grocery stocks'. Print Edition | Subscribe