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Tesco and Sainsbury’s are some of the staple ingredients of a well-balanced portfolio.

But a new political row over supermarket pricing is sparking questions over their beneficial effect.

Following Andy Burnham’s pledge to crackdown on consumer rip-offs, chancellor John Healey says the government is ‘watching closely for any suggestions that customers are being taken for a ride at the pump or the till.’

Concern that Budget could contain measures to make the weekly shop more affordable has turned the spotlight on shares in Tesco, Sainsbury’s and Marks & Spencer, the stock-market quoted names in Britain’s £196billion grocery market.

Should supermarkets be braced for Budget blows? Or can Tesco and Sainsbury disprove claims that offering misleading discounts to their loyalty scheme clientele?

Tesco’s might is built on its Clubcard scheme, while Sainsbury’s relies on its Nectar programme.

At the top: Ken Murphy is the chief executive of Tesco

These price-gouging accusations come from Giles Hurley, chief executive of Aldi, the privately-owned German chain - which does not operate a loyalty scheme.

The controversy has reignited on the fifth anniversary of the start of the cost of living crisis in August 2021 when the rate of inflation leapt to 3.2 per cent, peaking at 11 per cent in October 2022.

The current inflation rate is 2.9 per cent. Energy costs are going up, but food inflation has eased to 1.3 per cent. The long hot summer may have boosted sales of drinks, ice cream and snacks. But drought in the UK and Europe is set to cause crop shortages that could raise prices on supermarket shelves.

Against this background, the influential retail analyst Clive Black defends the listed supermarkets. They may be huge businesses, but their profit margins are tiny.

Tesco’s margin is just 4.3 per cent, as a consequence of what Ken Murphy, the company’s chief executive calls an ‘intensely competitive market’. Aldi, Asda, Lidl, M&S, Morrisons, Sainsbury’s and Tesco are remorselessly engaged in a fight for customers.

Currently these stores are supporting households by ‘absorbing undoubted cost pressures’, says Black who thinks the government should recognise that rather than being swindled by supermarkets, we are paying too little for our food.

Investing in food has always been considered a defensive strategy in a challenging era. But should the government’s campaign against these household names, however ill-thought out, put us on our guard? Here’s our guide.

Abuse of pricing power?

Investors can take some comfort from the 2023 Competition and Markets Authority investigation into the supermarket sector which found no evidence of profiteering.

Susannah Streeter of the Wealth Club points out that, if the government reopens this probe, the supermarkets’ wafer-thin margins suggest that the government will struggle to find evidence of price gouging.

More recently the former chancellor Rachel Reeves was forced to step back from price caps on bread, eggs, milk and other staples in the wake of a backlash from the Bank of England and from retailers.

Stuart Machin, chief executive of M&S, declared the proposal to be ‘completely preposterous’, adding that his chain lost money on items like milk ‘which is at a negative 7 per cent margin.’

But Streeter adds that Aldi may think it has nothing to lose from continuing to take the moral high ground.

Tesco and Sainsbury’s would be forced to defend their discounts against the assertion that they artificially inflate prices and then lower them.

If sufficient publicity surrounds such a war of words, customers could become suspicious which could be bad news for sales - and the shares.

At the same time Lale Akoner, global strategist at eToro, says that the supermarkets will come under pressure to keep prices down, even as energy, wages and other overheads go up.

But, if you believe that the British trust in supermarkets may be greater than our confidence in any government, this is the outlook for their shares

Tesco

Tesco is the £27.7billion titan of the grocery trade with a 28.5 per cent slice of the market. Its empire also encompasses the food wholesaler Booker and 560 central Europe stores, although these may be sold off, spelling an end to global dominance ambitions.

Tesco shares stand at 446p, having fallen by 10 per cent over the past six months, amid apprehension over the impact of the drought.

However, at the height of alarm over the 2014 accounting scandal that engulfed this high street stalwart, the shares slumped to as low as 169p.

Today the average target price for the shares is 550p. Bank of America is one of Tesco’s fans, citing its strong return on capital and reckoning that that it can take market share from “structurally weaker” rivals. Like Morrisons, maybe?

But Black of Shore Capital, although a long-term admirer of Tesco’s operational performance, now believes that the shares are fairly valued at their current level as competition gets tougher.

I am a long-term holder of Tesco, as I am impressed by so many aspects of the business.

Tesco offers ‘more dash than cash’ fashion under the F&F label: its Finest premium private label range skilfully caters for households looking for restaurant-level cuisine – and it can rely on Booker.

The sway of this business should ensure that Tesco should benefit from the best deals with food producers in the months ahead.

Competitive: Sainsbury's is Britain's second biggest supermarket

Sainsbury's

Sainsbury’s is Britain’s number two supermarket with a 15.2 per cent market share. Asda, Aldi, Lidl and Morrisons have 11.5 per cent, 10.7 per cent, 8.8 per cent and 8.5 per cent respectively.

The £7.2billion business is selling off its Argos homeware arm next February to pursue a ‘food first’ strategy.

The news that Sainsbury’s would no longer try to be a ‘multi-product, multi-channel retailer’ gave a small lift to Sainsbury’s shares. The City prefers supermarkets content to be humble grocers.

Currently, however, just two of the analysts that follow the shares rate them a ‘buy’ at 336p. The rest consider Sainsbury’s to be a ‘hold’.

As Ankoner explains, there are questions as to whether Sainsbury can sustain its recent market-share gain, while protecting its margins in an increasingly price-sensitive market.

It also seems that brokers would like Sainsbury’s chief executive Simon Roberts to snap up one of its competitors.

In 2018, Sainsbury’s was barred from acquiring Asda. But a potential target is the US private equity owned Morrisons.

Roberts could assure the government that the resulting economies of scale would produce eye-popping bargains.

It is worth staying on board to observe whether increased political scrutiny reshapes the sector.

Marks & Spencer

M&S is the fastest growing name in grocery, controlling 4.5 per cent of the market, following a 16 per cent bounce in sales in the four weeks to August 9, helped by its re-styled Sparks loyalty programme and the popularity of its ‘picky bits’ ranges.

These are snacks for sultry summer evenings when it’s too hot to cook.

Food is the ‘outstanding performer’ in the £8.07billion company’s latest results, although there may have been more headlines about Marks’ new cool status in fashion.

The shares have risen by 17 per cent since the start of the year to 384p. But a majority of analysts rate them a ‘buy', with an average target price of 437p.

Am I going to stay loyal to my M&S shares? Definitely. I am hoping that analysts’ projections prove reliable, and looking forward to Machin’s robust response to even a hint of Budget action.

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