Bernstein has launched coverage of six European food retail stocks, presenting a structured view of how companies in a low-growth, highly competitive grocery sector can still produce attractive returns.
In its initial set of ratings the bank designated Marks & Spencer and Polish convenience chain Zabka as Outperform, assigning price targets of
Three names were assigned Underperform ratings: B&M, with a price target of
French-Belgian retailer Colruyt was rated Market-Perform with a target.
Bernstein sets out a framework to explain who wins in these national grocery markets. The analysts describe the industry as national, inflation-linked, and intensely competitive, and say the majority of retailers occupy what they term the "squeezed middle."
According to the bank, only grocers with a substantial relative market share advantage - approximately twice the size of their nearest competitor - can consistently achieve returns on invested capital in excess of 10%. Those companies are classified as "Scale Leaders," with Tesco and Jeronimo Martins offered as examples.
But Bernstein highlights two other viable routes to attractive returns. First are "Hot Niche Drivers," which include Zabka and parts of Axfood; these operators can outpace peers by owning a differentiated niche. Second are "Transformers," such as Marks & Spencer, which may deliver stronger short-term returns if they successfully reinvent their business models. The bank contrasts these strategies with firms like B&M, which it views as likely taking longer to recover.
The analysts underscore the continued centrality of the physical store to a grocer's health. They write, "If we were ever going to shift to online grocery shopping, the global pandemic would have been the catalyst. But as soon as Covid fears faded, we raced back to supermarkets."
"The health of a retailer is visible in the store. When retailers begin to struggle, store experiences almost inevitably start to deteriorate," the analysts added. "Shrinking volumes lead to gaps on the shelf, yellow stickers, cuts to staff hours and poor service. In short: broken promises. This vicious cycle is very hard to turn around."
Bernstein also notes that none of the six companies it has begun covering currently meet the criteria for true scale leadership. Instead, each firm is either defending a hot niche position or attempting to improve its competitive position through transformation.
The initiation gives investors a framework to evaluate where individual retailers sit on a spectrum from scale advantage to niche ownership to transformational potential - and how that placement relates to achievable returns and recovery timelines.