UK grocery chains are being viewed by RBC Capital Markets as a relatively defensive sector as macroeconomic pressures mount. With upward pressure on oil and an expectation that food inflation will climb back toward 3%, RBC argues that households may reallocate spending away from discretionary categories and back into groceries, benefiting large supermarket operators.
Against this backdrop, RBC has increased price targets for both Tesco and J Sainsbury, referencing lower weighted average cost of capital assumptions and the companies' resilience. The firm, however, remains negative on Ocado, which it sees as struggling to reach profitability.
J Sainsbury
RBC identifies Sainsbury's as its preferred pick among the grocers covered. The investment case rests on the combination of a growth profile it considers comparable to Tesco's and a substantive valuation discount. RBC notes Sainsbury's is trading at about 14x CY26e P/E versus Tesco at roughly 16x, presenting what the analyst views as a more attractive entry multiple.
Market share gains are expected to accelerate for Sainsbury's, the bank says, supported by expansion of selling space and improvements in the retailer's price-to-value perception. Additionally, the retail media operation - Nectar360 Pollen - is tracking slightly ahead of its stated contribution target of pound;100 million to profits for FY27, providing a higher-margin growth element that RBC believes the market may be underestimating.
Further supporting Sainsbury's case, the company offers an ordinary dividend yield around 4% and maintains what RBC describes as a robust balance sheet.
Tesco
Tesco is characterized by RBC as best-in-class on operational measures. Consumer survey results cited by the bank place Tesco ahead on value, product range, availability and store standards. Despite these strengths, Tesco's valuation at about 16x CY26e P/E leaves less scope for upside, in RBC's view.
Reflecting Tesco's defensive attributes and a lower WACC assumption, RBC raised its price target from 440p to 465p. The analyst highlights several near-term headwinds: soft trading in Ireland, a challenging environment in Central Europe, and some negative impact from Booker following Pizza Hut's administration and Marks & Spencer ending its wholesale supply arrangement.
On the positive side, Tesco's energy costs are well hedged, the Whoosh delivery service continues to outperform expectations, and free cash flow should remain toward the upper end of the company's pound;1.4-1.8 billion target range.
Ocado
Ocado is at the opposite end of RBC's conviction spectrum. The bank highlights that Ocado's model remains heavily loss-making and forecasts negative EPS through at least FY28. Revenue is projected to fall from pound;1.69 billion in FY26 to pound;1.44 billion in FY27 before recovering thereafter, while net debt sits at nearly pound;900 million.
With consumers focused more on value and perception of price leadership concentrated among discounters and loyalty-priced majors, RBC regards Ocado's premium positioning as facing structural headwinds. The firm's 175p price target for Ocado implies limited upside from current levels and reflects the view that the business has yet to establish a clear route to sustainable profitability.
Context and implications
RBC's revisions underline a broader theme: in an environment where energy costs are moving up and food inflation is anticipated to rise, large supermarket groups with scale, diversified channels and defensive consumer propositions may see demand solidify relative to discretionary sectors. That said, the bank's views are differentiated across operators depending on valuation, balance-sheet strength and path to profitability.
Key takeaways
- Sainsbury's is the top pick due to comparable growth to Tesco and a valuation discount of roughly 2 P/E points on CY26e.
- Tesco receives a higher price target reflecting defensive attributes, but faces specific regional and wholesale-related headwinds.
- Ocado remains constrained by losses, forecast revenue decline into FY27 and nearly pound;900 million of net debt, leading RBC to maintain a negative view.