Morgan Stanley prefers Tesco over Sainsbury, says it's best placed for rising inflationary environment

Analysts at Morgan Stanley reiterated their preference for shares of Tesco over rival Sainsbury, arguing that the former was better placed to adapt to the expected higher food inflation and to protect its margins.

Staff shortages and rising seasonal workers' wages were also expected to be an issue.

Consumers meanwhile would also be faced with higher prices for fuel, utilities and general merchandise goods, which suggested that their shopping patterns would change.

Key to that assessment was Tesco's scale relative to rivals, they said.

It meant that Tesco could better negotiate terms with suppliers and had greater margin for manoeuvre to unlock costs, with proceeds from the latter freeing up funds for reinvestment in prices and promotions.

Indeed, a sensitivity analysis of the two grocers showed that in a scenario of declining revenues - as customers trade down or away from their stores - small shifts in sales and costs could have a "significant" impact on margins.

Thus, Morgan Stanley kept its recommendation for shares of Tesco at 'overweight' and that for Sainsbury at 'equalweight'.