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  1. Analysis
October 6, 2010

On the money: Sainsbury’s CEO talks up space growth

Sainsbury's chief executive Justin King said today (6 October) that the UK's retailer new space was performing "ahead of expectations" as the business pushes ahead with plans to add 2.5m square feet of space by the end of next year.

Sainsbury’s chief executive Justin King said today (6 October) that the UK’s retailer new space was performing “ahead of expectations” as the business pushes ahead with plans to add 2.5m square feet of space by the end of next year.

King, speaking after Sainsbury’s published its second-quarter revenue, said new space had contributed 2.3 percentage points of the sales growth the retailer booked in the three months to 2 October.

Last autumn, Sainsbury’s announced plans to increase its space by 15% by the end of next year. King revealed that over the second quarter, Sainsbury’s opened seven supermarkets, 12 convenience stores and completed seven extensions, adding 460,000 square feet of new space.

King emphasised that the moves meant Sainsbury’s is “adding more space proportionally to the business than any other grocer”.

He focused on its largest, and smallest store formats with announcements that in the last ten days of the quarter it has opened its largest store in England at Crayford, its largest store in Scotland at Darnley and its largest store in Wales at Newport.

Additionally, King revealed that Sainsbury’s convenience outlets had reached GBP1bn in revenue and had posted strong underlying like-for-like sales. He said that convenience is currently around one-third of the retailer’s space growth plans, although he added that as the extensions to its main stores pick up pace, the proportion would fall to around a quarter.

The retailer’s extensive store expansion plans are mainly focused on expanding its non-food offer. King announced in the company’s trading statement that non-food sales were growing at three times the rate of food, although he emphasised that “food is core” to the “success” of Sainsbury’s.

Nevertheless, Sainsbury’s is facing growing competition in terms of food space from Asda. When asked when Sainsbury’s would take the position of second-largest UK food retailer back from rival Asda, King said: “We don’t need to overtake Asda to achieve our growth plans”.

However, he added that by the time Asda completes its recently announced acquisition of Netto’s stores in the UK, “Sainsbury’s will open more space organically”.

The Office of Fair Trading has asked Asda to offload 47 Netto stores and Sainsbury’s new finance director John Rogers said the retailer was interested in acquiring a “handful of stores”, although he would not be drawn on exactly how many it was interested in.

Turning to Sainsbury’s online grocery operations, King painted a clear picture as to why the retailer would not be splitting out the details of how profitable that channel is any time in the near future. “Online customers are the best instore customers,” he said.

Using the company’s Nectar loyalty card data, Sainsbury’s has found that “when customers shop online, they become even more loyal”, King said. He explained that online grocery retail is part of the company’s “multi-layered” approach and that “picking instore reflects the complete relationship with customers at a local level”.

King said he was “very happy” with the profitability of its online operations but to split it out would be akin to asking how well a particular promotion on a single product performed.

While the Sainsbury’s boss was buoyant about the retailer’s plans, analysts did not share the same levels of enthusiasm.

Verdit consulting director Neil Saunders said that Sainsbury’s future results rely heavily on it executing its expansion plans. “The forward prospects for Sainsbury’s remain positive; however, future growth momentum will be largely contingent on a strong pipeline of new space and stores. While the company is on track to deliver 15% gross space growth by March 2011, it will need to keep up this pace of development to maintain current levels of performance,” he said.

Meanwhile, RBS analyst Justin Scarborough downgraded his position on Sainsbury’s shares from ‘buy’ to ‘hold’. “We like J Sainsbury, we like UK food retail, but Sainsbury’s valuation relative to Tesco and Morrison is too extended and leaves little room for multiple expansion.”

Shares in Sainsbury’s had fallen 0.9% to 386.3p at 14:59 on 6 October.

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