Comment: Sainsbury's solid but challenges lay ahead in tough sector
Sainsbury's to step up investment in convenience
Sainsbury's, the UK's third-largest grocer, yesterday (8 May) reported what amount to another solid set of annual results.
Net income was up, sales were higher and underlying pre-tax profits (excluding the impact of property disposals) grew. The retailer also claimed it had achieved its highest market share for a decade.
With Tesco in the middle of a wide-ranging programme to try to revitalise its UK operations and Morrisons continuing to see underlying sales slide (even if it says it is now moving in the right direction), Sainsbury's has been the most resilient of the quoted UK food retailers in recent times. Kantar data, which also takes in Asda, has also shown Sainsbury's gaining market share.
Chief executive Justin King pointed to Sainsbury's own-label, its Nectar card loyalty scheme and price comparison initiative Brand Match for its "market-beating" performance.
The retailer is wisely continuing to invest in expanding its convenience and online businesses, which saw sales increase by 17% and 20% respectively. Both operations are now worth at least GBP1bn.
In fact, much of Sainsbury's commentary yesterday was similar to what we heard last year, when it also reported higher annual profits and sales.
"Justin King has led Sainsbury to another year of steady progression in still challenging economic and sector conditions," Shore Capital analyst Clive Black said. "The group has outperformed its major peers and much of the market over the last seven years of consumer economic turmoil in the UK and so gained market share."
The year ahead promises more of the same. Sainsbury's said yesterday it would continue to plough investment into c-stores and multichannel. Sainsbury's has over 530 convenience stores but King revealed it believes it can have over 1,000. "We've got many years of development potential," King said of Sainsbury's convenience business, which has higher returns that its core supermarkets. The retailer's online strategy is considered - it is trialling initiatives in mobile and has opted not to offer a click-and-collecy grocery service, unlike Tesco and Asda.
Sainsbury's will continue to invest in its core estate, a strategy that interests some that question the long-term returns from traditional supermarkets and the more attractive returns from convenience. However, the retailer, King said, still had potential to grow its supermarket estate in the UK. He claimed Sainsbury's had a market share of less than 5% in 35% of the country's postcodes.
Nevertheless, online and convenience are, King said, Sainsbury's "growth engines" and the retailer is investing accordingly. But, of course, they are also battlegrounds for the UK's major retailers and Sainsbury's will need to keep investing in the channels, with Tesco and Asda doing the same.
Sainsbury's announcement - and associated press conference - was, pretty much, as expected. And that is to the retailer's credit, given the fiercely competitive nature of the sector and with consumers still under pressure.
The year ahead should again be one of progress for Sainsbury's but - and no doubt King and his team are more than aware of this - Tesco should surely prove a tougher competitor. Over the last 12 months, Tesco has invested heavily in its UK stores to try to breathe fresh life into its domestic business. Last month, Tesco indicated it too would focus more on its convenience and online operations in the UK, opting not to develop over 100 sites it had in its land bank.
"Tesco UK may finally be a more formidable competitor than has been the case for some years now. That may take some of the growth potential out of Sainsbury or at least make it more costly to compete, noting as we do flat margin guidance," Black said.
And, notably, the analyst added: "We also sense that Waitrose (John Lewis Partnership) may grow as a thorn in Sainsbury's side with its market share expected to exceed 5% soon." Waitrose continues to grow rapidly - its sales were up 11% in the first quarter of the year, with revenues from its fledgling online operations jumping 50%. Sainsbury's will do well to monitor the continued growth of its upmarket rival.
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