Food Retail Sector Update

J.P. Morgan's Food Retail team recommends that investors stay over-indexed in the Food Retail sector at the current juncture. The sector's long-term potential is fundamentally capped by mature markets, excess capacity, growing competition and format legacy, and it is not defensive fundamentally, as grocers have over-earned and had to reset margins. Grocers typically grow revenues in line with food CPI (+2-3%), with retail operating margins holding at 4-4.5%; in deflation, margins typically reset by 2-2.5pt. The team favours stock-picking: buy grocers after a proactive margin reset (price cuts) and sell them when they are over-earning. Top preferences include Jeronimo Martins (cheap valuation, Biedronka LFL reacceleration), Tesco and Sainsbury (less crowded positioning, relatively inexpensive, high capital returns), and Greggs over Domino's, while avoiding Ahold Delhaize, Colruyt and Carrefour. Ratings: Overweight JMT, TSCO, SBRY, GRG; Underweight AD, CA, BME, DOM, COLR.