RBC sees a buying opportunity in UK food retail stocks

Investing.com -- RBC Capital Markets sees an opportunity in UK food retail stocks following a recent sell-off that the bank believes is overdone.

The de-rating across the sector, which followed British supermarket and petrol chain Asda’s announcement last week, does not reflect the broader fundamentals, RBC analysts said.

While noting that Asda is moving swiftly to regain market share, the investment bank expects this to be a long-term process requiring significant investment.

“Asda still has a long way to go and a major price war is unlikely. We would buy the dip in UK Food Retail,” analysts led by Manjari Dhar said in a note.

Asda’s reintroduced its Rollback initiative in January, offering price reductions across about a quarter of its range.

Plans to extend this to 80% of its products over the next year may improve price perception, but Asda continues to rank below Tesco (LON:TSCO) and the discounters in value for money.

RBC highlights that Sainsbury’s invested £780 million over three years to correct its own pricing, and a similar scale of investment will likely be needed for Asda.

Beyond price, the firm sees further headwinds for Asda, including underinvested stores and weaker availability.

A recent revamp of its Pilsworth location cost about £2 million, and a broader modernization effort would require over £500 million.

“We think ongoing job cuts, as well as no bonuses for managers this year may weigh on staff morale, and could impact Asda’s ability to attract and retain high quality talent,” the analysts added.

Against this backdrop, RBC views the recent stock price movements as an opportunity for certain UK grocers, especially Marks and Spencer Group PLC (LON:MKS) and Sainsbury ’s  (LON:SBRY).

“In our view, the share price move in the last week has created an attractive opportunity for MKS, which is less exposed to higher price competition at the low end of the market,” the analysts said.

Sainsbury’s also remains well-positioned, given its premium focus and limited geographic overlap with Asda. Tesco, despite facing slower share gains, is seen as maintaining growth avenues in premium food and retail media.

Loyalty programs also give Tesco and Sainsbury’s a competitive advantage, according to RBC. Their long-established schemes provide valuable customer data and reinforce pricing perception, while Asda’s relatively new loyalty program is seen as less effective in driving consumer engagement.

RBC expects market share shifts to stabilize rather than a dramatic recovery for Asda, limiting further upside for Tesco. However, the firm sees more risk for discounters, which have greater customer overlap with Asda.

“For Tesco, whilst further share gains may be harder to come by, it still has plenty of avenues for growth eg premium food and retail media,” the analysts noted.