Sainsbury at low ebb, vulnerable to Tesco recovery

By Rod Addy contact

- Last updated on GMT

Sainsbury reported a 1.7% fall in like-for-like retail sales, excluding petrol
Sainsbury reported a 1.7% fall in like-for-like retail sales, excluding petrol

Related tags: Sainsbury, Tesco

Sainsbury’s suffering can “only intensify” according to one analyst, as the retailer’s poor third financial quarter (Q3) results highlighted its vulnerability should Tesco begin to recover from a tough 2014.

“This morning’s sharp decline in like-for-like sales shows Sainsbury’s suffering can only intensify as the effects of a new retail reality bear down hard on company performance,”​ said David Gray, retail analyst at Planet Retail.

“Sainsbury’s numbers are underpinned by some of the toughest market conditions in a generation, with the era of rising industry food values coming to an end as food price inflation falls back. Combine this with the twin threats of falling food volumes and the seemingly unstoppable rise of the hard discounters and there really is nowhere to hide for Sainsbury’s new boss.

‘Horrendous conditions’

“These horrendous conditions make it nigh-on impossible for Sainsbury to grow profits, in the short term at least, without raiding its valuable property portfolio. Sainsbury also looks increasingly behind the curve in terms of realigning its floorspace requirements, with larger rival Tesco having moved much earlier to combat hypermarket space issues.”

Clive Black, director and head of research at Shore Capital, warned: “Tesco UK is about to try at least to improve its competitiveness under the tutelage of new ceo Dave Lewis, who may provide more colour on matters following the group’s own trading update and analyst meeting on the January 8 2015.

“What we really worry about, therefore, is that if Tesco does ‘get its act together’, then Sainsbury may be particularly vulnerable.”

Black stressed that Sainsbury’s results had been “better than feared” ​and noted it had announced it would invest £150M in price cuts already this year. He also pointed to its plans to cut £500M of costs out of the business over the next three years.

Doubts

However, he said Asda’s simultaneous announcement of deeper price cuts, plus the fact that Sainsbury had made its move before Tesco’s strategy announcement tomorrow (January 8), raised doubts about its position.

George Scott, senior consultant at Conlumino, agreed. “The problem for Sainsbury is that the bar is being raised and it seems to be playing a game of catch up. Asda itself announced yesterday that it is investing £300M in lowering prices of thousands of items in Q1 ​[the first quarter] of 2014 alone.

“Moreover, Tesco is set to announce significant further pricing investment in its update tomorrow. Compared to these two rivals, Sainsbury has less room to manoeuvre and there are question marks over how long Sainsbury can continue to effectively play the pricing game and how much it can rely on its higher quality focus.”

Success

However, he underlined the success of its Taste The Difference range, sales of which had grown by 5% in Q3, and its convenience stores, which achieved 16% sales growth during the period.

Sainsbury reported like-for-like retail sales, excluding fuel, down 1.7% in the 14 weeks to January 3.

Ceo Mike Coupe commented: “The outlook for the remainder of the financial year is set to remain challenging, with food price deflation likely to continue. Our performance in the third quarter showed an improving trend quarter-on-quarter.

“However, given the uncertainty in the trading environment, food price deflation and the price reductions we announced this week, we currently expect our fourth quarter like-for-like to be similar to that of our first half.”

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