Goldman downgrades Morrisons as headwinds persist for UK grocers

Structural headwinds are persisting for UK grocers, with low inflation and falling calorie intake presenting a problem across the supermarket industry, according to Goldman Sachs.

The bank downgraded its recommendation on Morrisons to 'neutral' on Monday, saying the stock has now reached its target price. It reiterated 'sell' ratings on rivals Sainsbury and Tesco.

Goldman said grocers face "permanently structural demand shifts" which will result in lower-than-historical returns in the absence of invested capital reductions.

"A small recent slowdown in growth rate of the discounters has come alongside a more aggressive profit re-basing than we forecast by Tesco. The average 15% share price rise year-to-date for the group suggests growth, long-term margin and capex assumptions which we do not believe are achievable," it said.

A significant pick-up in market growth is needed to drive sales higher at the listed grocers' core large stores, but recent price-cutting campaigns and input cost deflation limit inflationary growth, Goldman said.

An 8% fall in average daily per capita calorie consumption in the UK over the past 10 years is also a "major headwind" to volume growth, it said.

Morrisons was trading 1.1% lower at 196.3p by 10:49, while Tesco and Sainsbury's rose 0.8% and 0.2% respectively.

Nevertheless, Goldman said Morrisons was "still the best of the lot". The bank said: "Morrisons’ lower exposure to large stores, lower proportion of leasehold stores, greater scope for cost savings, stronger balance sheet, and early profit re-basing mean it remains our preferred stock among the listed three UK grocers."