Fee Fi Fo Fum, this here market's looking dumb. This weekend’s talk of a ‘Tesco Tax’ (basically, a local authority levy on big supermarkets, aimed at putting life back into the high streets that Sainsburys and the like have all but killed off) has all the makings of a stock market opportunity. But then, you’ll have to forgive me for my ebullience. I’m a bit of a contrarian when I’m not wearing my librarian outfit, and this one just smells right.
The proposed Tesco Tax, in case you’ve missed it, is essentially a property tax on any plots of supermarket land that are considered to be worth more than £500,000 each. And on the face of it, it’s anti-competitive in the extreme. The councils would get the book thrown at them if they tried to implement it without parliamentary approval. Because fining one company for being more successful than another company is just not the way we do things in this country, dammit.
But……
In essence, if the councils were able to grab the hoped-for £400 million a year, with which to breathe new life into the high streets, I’d be the first to cheer. I’m a Sainsburys shareholder as well as a customer, and I feel deep personal guilt about the way that my tight schedule prevents me from spending twenty minutes in the butchers and another fifteen minutes in the greengrocers, and another fifteen in the bakery every time I do my weekly shopping. Anything that corrects the trading balance a bit and reduces the preponderance of charity shops and betting shops in my local high street has got my support. There, I’ve said it. Sorry, High Street.
The Issue
The vaguest rumours of a Tesco Tax have set the airwaves buzzing. Only this morning, Andrew Watters, tax specialist at law firm Thomas Eggar LLP, was fulminating that "the proposed supermarket levy, or “Tesco Tax”, is simply an additional tax cost on business” which would be “inevitably reflected in prices paid by consumers or in less successful businesses. One can see the attractions for central and local government to dream up new ways to nibble at the cake but this is a zero sum game.” And so so, and so on.
Mr Watters is more than welcome to scare us all, because the way I see it, £400 million isn’t going to mean a hill of baked beans to the big players (Tesco, Asda, Morrisons, Sainsburys, Waitrose, Aldi, the Co-op and the rest.) Tesco alone is making £3 billion a year in profits, and even the most pessimistic estimate for the big boys won’t be far short of £10 billion.
The outcry from the rest of the market is all going the other way. Why penalise the supermarket landowners, says the British Retail Consortium, when the real issue is that councils have no proper structural plans to liven up the high street? Why, small retailers ask, does the council car park cost £6 an hour when the Tesco car park is free? And anyway, could we really trust the councils to spend the £400 million wisely if they got it? Many have acquired an unenviable reputation for squandering revenues on themselves rather than their intended purposes.
The Opportunity
So how much would a 4% (based on £400 million) fall in their annual profits damage the bigger players? Always assuming, of course, that they actually suffered the penalty and were unable to deflect it in some other way?
Well, I’m going to stick my neck out and say that I’m watching with interest. As an investor, Sainsburys, Next, M&S and a few garden centres have done me very well over the last six years or so, and I’m a big believer in the fundamental strength of the UK retail scene. With p/es in the 8-11 range, last week’s stiff price falls (of 8% in Tesco’s but case, including a mid-sized profit warning) look tempting to me. We’ll have to see how this scare pans out. My guess is that it’s going nowhere.
