On the money: Sainsbury's vouchering "pivotal" to sales success
Justin King suggested to analysts that its couponing and vouchering activity has been a profitable driver for Sainsbury's
Sainsbury's said the group's level of couponing and vouchering activity has been pivotal to its sales success and dismissed an observation that the current industry level is unsustainable.
The UK retailer this morning (3 October) booked an increase in first-half sales driven by own label growth and the roll out of its convenience stores.
Like-for-like sales excluding fuel in the 16 weeks to 29 September were up 1.7%, while total sales were up over the same period by 4%, or 4.1% excluding fuel.
Speaking on the group's earnings call this morning, chief executive Justin King suggested to analysts that its couponing and vouchering activity has been a profitable driver for Sainsbury's.
"Using Nectar data, we are very confident that the activity we are doing is profitable for Sainsbury's. We simply don't recognise the observation that the current level of couponing activity, as far as Sainsbury's is concerned, is unsustainable. Far from it. It's pivotal in our sales success."
He added: "Our ability to identify what customers are doing, their habits and to reward and incentivise them, means we can be very clear about the profitability of the money we are investing. With Nectar we can observe changes more generally. So our level of activity at the moment is sustainable."
Sainsbury's launched its Brand Match promotion in October last year, which offers consumers a coupon for the difference from a shop if the basket of products is cheaper at its rivals.
Other retailers have also either introduced or increased their usage of similar schemes over the last year.
Earlier this year Tesco, which admitted it was slow out of the block, offered a GBP5 (US$7.60) voucher on any spend over GBP40. CEO Philip Clarke has slammed the high level of coupon promotions in the market, calling it "unhelpful" but conceded that it must continue to play its part or risk falling behind.
Sainsbury's, Tesco and Asda, however, have been at the forefront of the increase in couponing.
With that in mind, King told analysts: "We are comfortable maintaining our guidance of flat margin. Other retailers have clearly not got flat margin at the moment, they are seeing significant declines. It may therefore be that the activity they are pursuing is not profitable."
Investec analyst Dave McCarthy said that while Sainsbury's trading was "better than expected", analysis of the figures was "concerning" for the retailer and the industry.
"LFL in the second quarter was up 0.9% excluding extensions, and was flattish excluding maturing stores. When we strip out inflation, growth in convenience and growth in the internet, LFL volumes are down over 3% in the core estate. This may mean that Sainsbury is not in as bad a position as its competitors, but ultimately this rate of volume decline will present major problems."
King conceded that Sainsbury's was seeing a level of volume decline in the market that was "greater than anticipated", adding that there was "no doubt" about the overall pressure in core space in the industry.
"It is self-evident that the industry is adding, in total, more space than the total growth in the industry so the core space for the industry is undergoing that squeeze. For the individual retailer, the question is whether your core space is hurting more or less than the rest because that's what presents you with the profitability challenge.
"Self-evidently, with our underlying performance, if you strip out all of those things, our core space is under less pressure than that net of the rest of the grocery industry and that is a competitive advantage, albeit it is a competitive advantage of having a lesser negative, but we are very comfortable with the performance of our activities."
For the remainder of the year and going forward, King said the picture on volume declines was likely to remain the same.
"We sit here now in an industry with maybe only 1% [total growth] depending on which market data you look at, and inflation at 3%, it's clearly still 1-2% volume decline overall. That looks like that will be the picture for this year and it will probably be prudent to assume that that carries forward. But it only leads to all those things I've talked about before ... switching [to own label] and savvy shopping more generally. We have been able to help our customers with that well and that's why we have been able to grow throughout the economic downturn."
Sainsbury's initial campaigns promoted brands, own label products, and buying basic ingredients. As the credit crunch continued, Sainsbury's launched Live Well for Less. Tesco emphasized price in 2008...
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