Sainsbury’s – last year’s darling of the UK grocery retail scene – booked a disappointing set of results yesterday (23 March), sparking fears for the health of the UK grocery sector. However, Katy Humphries suggests, the slowdown at Sainsbury’s does not necessarily bode ill for the rest of the country’s supermarket operators in the medium term.
UK supermarket group Sainsbury’s booked a slowdown in revenues for its fourth quarter yesterday, with same-store sales rising just 1% during a period when the top-line was boosted by inflation. Stripping out the impact of inflation, same-store sales were actually likely to have been down by more than 2%. This compares unfavourably to last year’s fourth quarter identical sales growth of almost 4% and emphasises the economic constriction that has gripped the UK.
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Sounding a now all-too-familiar note of caution, chief executive Justin King said that the “tough” trading environment was the consequence of a more cautious – and poorer – consumer. Expected tax hikes and job losses have hit consumer confidence and rising inflation has had a material impact on the spending power of Sainsbury’s customer base.
Significantly, King added, the outlook for consumer spending power does not look set to improve. Speaking during a conference call, King warned that there are”no signs that the pressures consumers are currently under will ease”.
“There’s no good news on the horizon for customers,” he added. “We expect the consumer environment to remain tough, with our customers facing fuel price inflation, uncertain employment prospects and a reduction in government spending.”
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So, with Sainsbury’s suffering, are we likely to see the UK sales of the country’s other big retailers being hit even harder by the country’s poor economic outlook?
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By GlobalDataFor the most recent quarter, the answer is yes.
While Sainsbury’s missed forecasts, King emphasised that the group’s performance was ahead of the market in the ten weeks to 10 March. Indeed, according to the latest figures released by Kantar Worldpanel Sainsbury’s – along with Morrisons – has outperformed the market and grown its share of UK grocery sales of late. The company was also ahead of its peers during the key Christmas trading season, when sales rose 3.6% year-on-year.
Delivering its fourth-quarter numbers yesterday, Sainsbury’s confirmed that space expansion – through store extensions – contributed the lion’s share to its same-store sales growth. Stripping out the impact of space expansion and the VAT hike, King said identical sales would actually have edged up between 0.5% and 1%.
This could mean bad news is on the way from Tesco and Wal-Mart-owned Asda as they already operate a greater number of larger outlets and as a consequence do not have a comparable store expansion programmes.
However, there are a few factors could work in favour of Sainsbury’s competitors in the remainder of the year.
The economic squeeze in the UK hit lower income households first, as was witnessed by the fall in revenues at Associated British Foods‘ discount clothing unit Primark last month. With lower income households more likely to buy their groceries at supermarkets with a stronger value proposition – namely Tesco and Asda – it is possible that these retailers have already seen the harsher affects of reduced disposable incomes hitting this demographic. If the impact of declining consumer confidence hit them earlier, this could have contributed to Sainsbury’s ability to generate sales ahead of the market. As lower consumer confidence catches up with Sainsbury’s, its sales will come under a similar pressure already experienced by other retailers and it could become a whole lot harder to “beat the market”.
Additionally, as a slightly more up-market retailer, when it comes to belt-tightening Sainsbury’s core-shoppers are likely to have a few extra notches at their disposal – meaning that it is easier for them to reduce their spending without a significant fall in their standards of living. On the other hand, households on a lower income may find it harder to reduce their spending as much without witnessing an extreme difference in their lifestyles. The consequence being that Sainsbury’s shoppers may be more apt to reduce spending and trade down simply because their is a ‘down’ to trade to.
And trade down might mean more than ditching brands and buying ‘value’ cornflakes: it could include trading down where you shop and switching allegiance to more value-oriented retailers. After all, this trade down factor provided an albeit short lived boost for Wal-Mart when the credit crunch hit in the US market last year, so it seems possible – if not probable – that Wal-Mart’s UK arm Asda could witness a similar uplift in footfall.
Indeed, both Tesco and Asda have increased their value messaging and cut prices in a bid to woo cash-strapped consumers. Communications from both of these camps are currently firmly focused on pricing and value, even as Tesco insists that ‘value’ is about more than just price.
To combat the tough consumer environment and mounting competitive pressures, King said Sainsbury’s had introduced its own value-based initiatives such as its meal planner tip cards, which help shoppers find up to five family meals for about GBP20.
What remains to be seen is whether such initiatives will be enough to stem the tide of Sainsbury’s sales slowdown.
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