According to a report recently published in the Telegraph, UK supermarkets have been expanding too fast, especially in these economically trying times. During the height of the profit binge, leading supermarkets announced that they would be opening new stores with total retail space of 41 million square feet.
If all that square footage were to be taken into account, it would be equivalent to all 2,700 Tesco stores which are already struggling due to a strained economy. In response to this outlandish overexpansion of the three main chains, Tesco, Sainsbury and Wm. Morrison, Citigroup has downgraded their stocks.
Citigroup has now downgraded the three supermarkets and J Sainsbury has gone from Hold to Sell whilst Wm. Morrison has gone from Buy to Hold. Furthermore, Tesco’s target price is now down by 55p it is rated as Sell. This does not bode well for the top 3 on the exchange nor does it bode well in forecasts of profitability.
Analysts believe that the stores are still riding on the back bumper of the high profits they realized between 2007 and 2010 but profits are down and going lower by the day. Citigroup maintains that opening all those new locations will be a certain death, or at least a loss of huge proportions. In fact, Citigroup is on record as saying that those new stores have already have already heavily weighed on sales growth.
Recent studies have shown that consumers are not spending what they had been at the supermarkets and all forecasts predict that consumers will further tighten up their belts because the economy is not forecast to get better. In fact, the future looks grim for consumers as well which is why Citigroup feels the opening of those new stores should be scrapped – or at least tabled until the economy improves.
