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Fund managers eye winners from high street price wars

As the internet drives down prices in the embattled supermarket and wider retail sector, fund managers are eying those stocks which can rise to the pressure.

 
Fund managers eye winners from high street price wars

EasyJet founder Sir Stelios Haji-loannou’s recent foray into retail demonstrated the difficulties in trying to innovate in a sector hit hard by pricing wars and changing consumer behaviour.

Part social enterprise, his recently opened ‘easyFoodstore’ in North London sells staple foods for 25p. Swamped by crowds as word spread, the store was forced to shut its doors for a few days before reopening with bouncers.

The episode underlined consumers’ eye for a bargain, which has driven down the margins of many of the high street players and left the big four supermarket chains playing catch up with the discount chains.

Eric Moore, the Citywire AAA-rated manager of the Miton Income fund, said: ‘Many of them have not been great investments because the competition is brutal.

‘For one thing, the internet has increased price transparency so it is now much easier for people to shop around before they make a purchase. This means retailers are having to invest a lot more in becoming multi-channel. It’s a big cost to bear.’

But despite the doom and gloom around the sector, consumer spending has held up reasonably well, rising 2.7% last month, the fastest annual growth rate since May 2015. The key is to identify the emerging trends, particularly online, and those retailers that are best able to adapt.

Sainsbury’s expansion

Sainsbury’s (SBRY) is trying to move into the latter camp after tabling a £1.3 billion bid for Argos owner Home Retail Group (HOME).

Leigh Himsworth, AA-rated manager of the Fidelity UK Opportunities fund, recently bought into the supermarket on the back of the news. He expects the acquisition to be used to build a ‘click and collect’ model (where people can order goods online, but pick up in a local store) to revitalise sales.

‘Over Christmas a lot of people used Amazon, but they also used John Lewis, which did well off its click and collect partnership with Waitrose,’ he said.

‘That is probably what Sainsbury’s is trying to do with the Argos buy. It is off the beaten track, but Argos has spent a lot of time and money improving the customer service experience. Therefore it will sit well with Sainsbury’s in a click and collect pattern. So as a strategy it makes sense as a lot of people have a Sainsbury’s near them.’

Alan Custis, AA-rated head of UK equities at Lazard Asset Management, said the deal highlighted how traditional retailers needed to adapt to changing consumer trends or risk losing relevance.

‘The Sainsbury’s-Home Retail transaction is fascinating,’ he said.

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