Will Amazon’s Whole Foods adventure derail Tesco plc’s turnaround?

Rupert Hargreaves — Sun, 27 Aug 2017 08:18:27 +0000

Amazon seems to be trying to disrupt every retail market it can access. For established companies, this is a huge problem as Amazon has proven itself to be highly efficient at conquering market share, wherever it sets its sights.

So when the company announced that it was buying upmarket supermarket Whole Foods earlier this year, food retailers around the world shuddered.

The Amazon-Whole Foods deal officially completes tomorrow, and Amazon is wasting no time stamping its mark on its prey.

Indeed, at the end of last week, Amazon announced that it will cut prices on organic staples such as bananas, avocados, eggs, farmed salmon, kale and lettuce, some apples, butter and other products. As Whole Foods has a limited presence here in the UK, initially the impact of these changes will be minimal. There are fewer than 10 UK Whole Foods stores, most of which are in London, but considering Amazon’s rapid pace of expansion, it won’t be long before more are opened.

It will be yet another thorn in the side of UK supermarkets. Amazon already has a well-established UK distribution network, and it won’t take much for the company to develop its offering and sell Whole Foods products online around the country.

The presence of yet another competitor may derail the Tesco (LSE: TSCO) turnaround plan.

Recovering slowly

Since its accounting scandal in 2014, Tesco has been working hard to improve margins and tempt customers back into its stores. The plan seems to be working. In the first three months of this year, like-for-like sales rose by 2.3% – ahead of analysts’ prediction of 2.2%.

Still, the firm’s recovery looks fragile. Even though sales are ticking higher, profit margins are razor thin. For the financial year ending 28 February 2018, analysts are expecting the company to report a pre-tax profit of £1bn on sales of £57bn.

If Amazon sets off another price war, Tesco will have to slash prices further and increase loyalty rewards to maintain sales growth hitting the bottom line — bad news for investors but good news for customers.

Not much room for manoeuvre

Shares in Tesco currently trade at a forward P/E of 18.4, a high multiple that does not leave much room for manoeuvre. If there is a price war with Amazon, the company’s recovery would have to be put on ice, and it’s difficult to tell how the retailer’s shares would react to lower growth expectations.

Considering the problems Tesco is still facing, and the likelihood of a price war with Amazon, it may be time for investors to dump the retailer. The shares look expensive, and an estimated dividend yield of 1.7% does not look particularly attractive. There are plenty of other companies out there with brighter outlooks for growth and market-beating dividend yields.

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes

Is this best way to profit from Amazon.com, Inc’s world domination?

Rupert Hargreaves — Thu, 06 Jul 2017 08:49:52 +0000

The rise of US retail and tech giant Amazon.com has dominated headlines for the past few years. It seems as if every day the tech giant either enters a new industry or is blamed for putting another struggling retailer out of business.

Unfortunately, for UK investors it’s hard to profit from Amazon’s meteoric rise. Shares in the company only trade in the US in dollars, which opens investors up to foreign exchange risks as well as higher costs from having to deal in a different country, in a different currency and hold non-sterling denominated shares.

However, there is one investment trust that has made its reputation by investing overseas and has been a fan of Amazon for many years. To complement its Amazon holdings, the trust also owns the likes of Facebook, Google’s parent company Alphabet and Chinese internet giants Alibaba and Baidu. Put simply, this trust is a play on all things internet and offers exposure to assets UK investors would not usually be able to access without opening a US dollar investment account.

International diversification

The investment trust in question is the Scottish Mortgage Investment Trust (LSE: SMT). With a market value of £5.5bn, Scottish Mortgage has recently been promoted to the FTSE 100. Year-to-date, shares in the trust are up around 23.4% as it has profited from the US tech sector’s continued positive performance.

Over the longer term, returns are even more impressive with the trust adding 51% during the past two years excluding dividends. Over the previous five years, it returned 207%, compared to the FTSE 100’s return of 30%.

The divergence in returns between Scottish Mortgage and the FTSE 100 shows how important it is to diversify outside the UK to profit from global investment themes. At the end of the first quarter, the trust’s largest holding was Amazon with a weighting of 9%. This position was closely followed by Tesla with a weighting of 7.7%. China’s Tencent Holdings accounts for 6.1% of assets under management.

Key themes

These holdings provide exposure to some of the largest investment themes in the world today. That is, the rise of China as a global superpower with over one billion consumers, the shift away from polluting hydrocarbon powered vehicles towards cleaner electric vehicles, and the dominance of online shopping.

There are few companies listed in the UK that are direct plays on these themes, and those that are, do not compare in terms of size and scale. This is why Scottish Mortgage would make a great addition to any portfolio. The trust offers exposure to the fast-growing US tech space and China’s economy through a well-diversified portfolio that would be difficult to replicate for most investors. With a total expense ratio of 0.45%, the trust is also relatively cheap. And a dividend yield of 0.76% is on offer for income investors although, considering the holdings, Scottish Mortgage is mainly geared towards capital growth.

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