News Column

UPDATE: Sainsbury's Profits Up, But Growth Stalling

May 7, 2014

Rowena Harris-Doughty

LONDON (Alliance News) - Supermarket chain J Sainsbury PLC Wednesday reported higher profit for its last financial year under Chief Executive Justin King, but predicted little or no growth in the current year as the big four supermarkets battle it out to attract consumers who are still spending cautiously.

The third-biggest of the UK's supermarkets by market share has been outperforming its peers in recent years, but its growth has slowed in recent quarters as the big four have lost customers to both the heavy discounters like Aldi and Lidl as well as top-end retailers like Waitrose.

Tesco PLC, the biggest of the UK's supermarkets, and struggling rival Wm Morrison Supermarkets PLC have both pledged to spend heavily on what they describe as their customer propositions. Those include things like loyalty schemes, but most of the spending will be on price cuts.

King again said Sainsbury's would not be dragged into the outright price war engulfing its rivals, but said the company would remain competitive using its brand match programme, which gives customers vouchers to cover any difference in prices of branded goods they paid for at Sainsbury's that were cheaper at Tesco.

Sainsbury's pretax profit rose 16% to GBP898 million in the financial year to March 15, beating analysts' expectations, as it booked gains on the value of its properties and as sales rose 2.8% to GBP23.95 billion, driven by the opening of more convenience stores and further growth online.

However, like-for-like sales including VAT and excluding fuel grew just 0.2% including contributions from store extensions, and were flat excluding them. That was a marked slowdown on recent years. Growth was 1.8% in the year to March 16, 2013, and was 2.1% in the year before that.

"Like-for-likes are running out of steam, and profitability might well have peaked for the medium term at least. The domino effect of the near GBP1 billion price action announced by Tesco, Morrisons and Asda for this year alone leave Sainsbury's already frail margins looking vulnerable," said Bryan Roberts, Retail Insights Director at Kantar Retail EMEA.

"Of course we will match our competitors toe to toe, but we will do that through brand match...In the end that is what the strength of this brand is built on," CEO King said.

Sainsbury's said that conditions in the retail food sector are likely to remain challenging for the foreseeable future, but reiterated that it is still confident in outperforming peers in the year ahead.

The group said it maintained market share at 16.8% last year, compared with Tesco's 30% market share.

King has led Sainsbury for 10 years, turning it from a declining giant to one that is challenging Asda as the UK's second-biggest supermarket chain by market share. During his tenure, Sainsbury's profit has trebled, rising for nine years in a row, while it has built an online grocery business worth GBP1 billion and receiving over 190,000 orders each week. He is being succeeded in July by Commercial Director Mike Coupe.

"Under his leadership, customer transactions have increased by ten million a week to around 24 million, annual sales have grown by GBP10.3 billion to GBP26.4 billion and underlying profit before tax has trebled to GBP798 million. He has been a truly exceptional leader and, on behalf of all our colleagues, I thank him for his outstanding achievements," Chairman David Tyler said in a statement.

Sainsbury's shares initially rose Wednesday, as investors cheered the better-than-expected profit. However, the stock reversed the early gains, becoming one of the biggest fallers on the FTSE 100 as latest industry data showed the market share of the big four again being squeezed by the discounters and premium grocers.

The stock was down 3.2% at 322.80 pence Wednesday afternoon.

The company has become known for the quality of its own-brand offering rather than trying to be the cheapest of the UK's supermarkets overall. Tesco and Asda continually slug it out on price and value, while Morrisons has had to launch its own round of price cuts, particularly in a bid to stave off heavy discounters Aldi and Lidl.

King said that Morrisons has introduced the most competitive pricing over the last few years, but said that was because the supermarket chain is desperately trying to catch up with the market.

Morrisons recently announced a new restructuring programme, including selling off some assets like baby product retailer Kiddicare, investing in price cuts, property disposals, and investments in the online business it is just getting going.

Sainsbury's said its online business grew by more than 12% during the year, achieving over GBP1 billion in annual sales. Its convenience store business grew 19%, while its general merchandise and clothing arm grew at twice the rate of food.

Sainsbury's now has more convenience stores operating than supermarkets, and says it thinks convenience is still a big growth opportunity going forward. It expects to open two of the stores a week in the current financial year.

Sainsbury's said it will be spending less money on new supermarkets, and will pump more money around the business into store refits, refurbishments, and its convenience store business. Last year it spent GBP888 million on capital expenditure, or around 3.4% of sales, far less than analysts were expecting. The grocer said it will spend a similar level on capital expenditure in the year ahead, and even less in the next financial year.

It proposed a full year dividend of 17.3 pence, up 3.6% from the 16.7 pence a year earlier.

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Source: Alliance News

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