Sainsbury's: It's still a 'challenging market' and could get worse

  • Sainsbury’s full-year results: pre-tax profit down 1%, supermarket sales down 0.6%;
  • Argos a bright spot, but analysts say “core brand seems to be struggling;”
  • Supermarket hit by changing consumer habits, competition, and economy.

LONDON — Sainsbury’s CEO Mike Coupe warned on Wednesday that the supermarket sector remains a “challenging market” as the grocer delivered its full-year results.

Coupe said in the statement: “Our food business remains resilient in a challenging market and we continue to innovate in quality and to invest in price.”

Sainsbury’s also warned that the “the picture is changing” for the UK economy, suggesting things could get even worse for the retailer.

Sainsbury’s pre-tax profit fell 1% to £581 million in the year to March 11, 2017, but that was largely in-line with market forecasts.

Argos, the catalogue retailer acquired by Sainsbury’s last year, played a key role, contributing £77 million to pre-tax profit and helping group sales rise by 12.7% to £29.1 billion. Sales at Sainsbury’s sales fell by 0.6%.

Neil Wilson, a senior analyst at ETX Capital, says in an emailed statement: “While the core brand seems to be struggling and losing ground to rivals, recently-acquired Argos is delivering the top line growth that keeps the group above water.”

Changing shopping habits are hurting supermarkets

Sainsbury’s is facing several very big problems: 1) consumers are no longer shopping in big supermarkets; 2) competition from rivals is intense; 3) the economy is on rocky grounds.

On the first point, Sainsbury’s results show supermarkets sales declined by 2% last year. Meanwhile, sales at its smaller Sainsbury’s Local stores grew by 6% and online sales grew by 8%.

Rather than do a big weekly shop at the large, out-of-town supermarket, consumers are increasingly picking up bits they need for dinner at smaller convenience stores and then doing a weekly shop online. This leaves supermarkets with big supermarkets that are increasingly struggling to pay their own way.

Sainsbury’s is trying to combat this by putting Argos stores in its supermarkets, giving people another reason to visit, and investing in non-food offerings such as clothing and banking. The supermarket is accelerating plans to put 250 Argos Digital stores in its branches, it said on Wednesday.

Coupe says: “We are investing in growth areas of the business to meet the changing ways that customers shop. Sainsbury’s design-led General Merchandise and Clothing both outperformed the market and we saw strong growth in Sainsbury’s Groceries Online and Convenience channels.”

Competition on all sides

On the competition point, ETX Capital’s Wilson says: “On one side there are discounters like Aldi and Lidl crushing prices and stealing market share, while Tesco and Morrisons are both in the middle of strong turnaround programmes that are leaving Sainsbury’s trailing. Waitrose is continuing to mop up the top end of the market, enjoying an unbroken run of growth in market share since 2009.”

Data from the British Retail Consortium (BRC) and Nielsen, released Wednesday, shows supermarket prices have now been declining for four years due to intense competition in the sector. Prices fell by 0.5% in April compared to a year earlier.

Sainsbury’s warned in Wednesday’s update: “The market remains competitive and the impact of cost price pressures remains uncertain.”

Finally, Sainsbury’s also warns that the overall British economy is facing a squeeze, which could obviously have a knock-on effect on its business. Inflation is beginning to bite due to the fall in the pound, which could drive up supermarket prices and hit sales.

The supermarket says that the economy has been more resilient than expected since last year’s Brexit vote. But it says:

The picture is changing now, as the impact of the devaluation of sterling and a higher oil price filter through to food, general merchandise, clothing and fuel prices and the gap between inflation and wage growth narrows.

After more than two years of deflation, food and fuel prices started to rise towards the end of our financial year, driven by the devaluation of sterling and commodity price increases. While this has benefited food retail market growth, general merchandise and clothing sales growth have been impacted by reduced consumer confidence and a marked slowdown in real pay growth. Economic commentators are divided on the implications for the UK economy, but there are fears that this slowdown in real income might drive a reduction in GDP growth, an increase in unemployment and a reduction in the rate of unsecured credit growth.

Sainsbury’s stresses that it is “well placed to navigate the external environment” but the warnings on the economy, changing consumers, and falling sales have seen shares open lower.

Here is how Sainsbury’s stock looks after 20 minutes of trade in London on Wednesday:

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