Tesco Corporation (USA) (TESO) vs. Wm. Morrison Supermarkets Plc (MRW)? Why Not Own Both?

LONDON — Which of the U.K. supermarket giants should you invest in? Few industries spark the same level of debate and disagreement among investors as the grocery business — and everyone seems to have a favorite brand. Today I’m looking at my two favorite U.K. grocers, Tesco Corporation (USA) (NASDAQ:TESO) and Wm. Morrison Supermarkets plc (LON:MRW), and explaining why I think you could own shares of both.

But is it sensible to own shares of more than one supermarket in the same portfolio? Are the businesses too similar? And why own shares in a supermarket, anyway?

Supermarket sweep
The economic characteristics of the supermarket industry are unusually attractive. Cash generation is both generous and consistent. Capital expenditures for maintenance are relatively low once stores are opened and infrastructure is in place.

Retained cash flows can usually be deployed predictably, with lucrative returns on capital, by expanding or opening new stores. Crucially, supermarkets fill an important and persistent need for consumers. These attractive characteristics mean I’m happy to own more than one supermarket, at the right price, if they offer sufficiently diverse future prospects and services.

But are Tesco Corporation (USA) (NASDAQ:TESO) and Wm. Morrison Supermarkets plc (LON:MRW) really that different? I think they’re both great businesses in their own right.

Tesco vs. Morrisons
Tesco Corporation (USA) (NASDAQ:TESO) is easily the market leader in U.K. groceries, with more than 30% market share and about 3,000 U.K. stores. But that’s less than half of the story. Tesco is rapidly expanding abroad, with almost 4,000 stores now located in “growth regions” such as Turkey, Thailand, Poland, and South Korea.

Wm. Morrison Supermarkets plc (LON:MRW), meanwhile, has been cautious, rather than cavalier. Facing Tesco Corporation (USA) (NASDAQ:TESO)’s U.K. dominance, Morrisons has flourished by picking its fights intelligently. For example, Morrisons has seemingly waited until the last possible moment to move into express stores, opportunistically poaching shops from bankrupt high-street chains Jessops, Blockbuster, and HMV. Where Tesco has led the way in market innovations such as online groceries, Wm. Morrison Supermarkets plc (LON:MRW) will attempt learn from its rival’s mistakes and gain a “last-mover advantage.”

With less than 600 shops, Wm. Morrison Supermarkets plc (LON:MRW) has only a fraction of Tesco Corporation (USA) (NASDAQ:TESO)’s store base and no international prospects. While shoppers will associate Morrisons and Tesco as direct competitors in the U.K., the companies are notably different and seem likely to grow though separate channels.