Sainsbury suffers from ‘unstoppable growth’ of discounters

By Michael Stones

- Last updated on GMT

Sainsbury's falling sales revealed the pressure exerted by the hard discounters Aldi and Lidl, said Planet Retail
Sainsbury's falling sales revealed the pressure exerted by the hard discounters Aldi and Lidl, said Planet Retail

Related tags Sainsbury Retailing

Sainsbury’s falling profits and sales – revealed in first-half results for its 2015 financial year – show the pressure exerted by hard discounters Aldi and Lidl, according to retail and city analysts.

The retailer reported a pre-tax loss of £290M for the 28 weeks to September 27. Like-for-like (LFL) sales, excluding fuel, fell by 2.1%. Total retail sales remained flat.

Underlying basic earnings per share fell by 12.7% to 14.5p compared with 16.6p in the same period of last year.

Planet Retail said Sainsbury’s sharply deteriorating competitive position reflected two main threats. “The twin threats of falling or flat industry food volumes alongside the seemingly unstoppable growth of the hard discounters are now hitting the company performance hard,”​ said analyst David Gray.

It remained to be seen whether partnering with Danish operator Dansk Supermarked to open their first Netto store​ in Leeds will help to defend Sainsbury’s market share.

Superstore format

But the retailer must not neglect its core hypermarket and superstore format – which still accounts for nearly 80% of Sainsbury’s sales and probably a higher proportion of profits, said Gray.

Convenience and online accounted for just 7% and 4% of company sales respectively. By 2018, that will grow to 11% for convenience and 5-6% for online, predicted Planet Retail. “Big increases, yes, but still small relative to the critical big-box channel,” ​said Gray. “Sainsbury’s must therefore continue to give its largest channel the attention it deserves.”

Shore Capital judged the retailer had delivered results ahead of expectations. But its short- to medium-term earning prospects will depend on the magnitude of the much anticipated Tesco price/margin reset. “While we applaud Sainsbury’s greater capital discipline, the focus on debt reduction and strengthening the group’s balance sheet, we struggle to forecast future years with confidence,” ​said analysts Darren Shirley and Clive Black.

Shore Capital retained its ‘hold’ advice on Sainsbury’s stock.

Online, convenience and discount channels

Sainsbury the grocery sector was still changing as customers shopped more frequently and made greater use of online, convenience and discount channels channels. It expected LFL sales in the sector to be negative for the next few years, but said it had robust plans to address the challenge.

Chief executive Mike Coupe told BBC Radio 4’s Today programme: “We anticipate the next couple of years in our industry will be extremely challenging. The reality is we are seeing deflation for the first time probably in around 10 years.”

Meanwhile, Sainsbury reported investing £150M in price cuts, about half of which will fall in the second half of 2014/15 and the remainder in the first half of 2015/16.

It also reported one-off charges of £633M, including £287M for changng its store opening plans. Sainsbury confirmed that it did not intend to build as many large stores as previously planned. But it will open 500,000 sq ft of space in each of the next two years, followed by 350,000 sq ft in 2017/18. Opening plans included: eight new supermarkets and four replacement stores. "Over half of our new space will be convenience stores as we continue to target opening 100 convenience stores per year,”​ it said.

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