Blog: Are success and disappointment merely basis points apart?

Petah Marian | 16 June 2011

Sainsbury's was relatively bullish about its first-quarter results yesterday (15 June), while Tesco was more circumspect in its announcement a day earlier.

Tesco, the UK's largest retailer, reported a 0.1% decline in UK like-for-like sales, excluding VAT and petrol.

Meanwhile, Sainsbury's, the country's number three retailer, posted 1.9% like-for-like sales growth, excluding petrol, but including VAT. Sainsbury's did not post like-for-like numbers excluding VAT.

However, once you take out some of the padding from Sainsbury's like-for-like numbers, is the positive perception around Sainsbury's numbers simply, as Arden Partners analyst Nick Bubb put it, the result of it having "about the best PR in the business"?

Sainsbury's chief executive Justin King said that if its like-for-like sales growth removed VAT, its number would have been "closer to around 1%", which he described as being "in-line with expectations".

However, Bubb said that the 1.9% like-for-like growth is "below expectations of at least 2.5%" and that the ex-VAT outcome is "barely better" than Tesco's results, despite Tesco's bigger non-food exposure.

Indeed, Morgan Stanley analyst Geoff Ruddell said that, once you take out inflation of around 3%, and store extensions, which contributed around 1% of the like-for-like growth, Sainsbury's underlying volume growth was in a negative territory, just like Tesco.

General merchandise seems to be the hardest hit category for both retailers, with Sainsbury's avoiding making its oft-repeated statement that non-food was growing at three-times the rate of food, although King said the retailer's non-food growth was "outpacing the market".

Similarly, Tesco chief executive Philip Clarke said the retailer faced challenges in its non-food departments, where reports have had him say that like-for-like sales were down about 5%.

It's no longer news to anyone that consumer confidence is down, and with rising inflation and higher fuel prices putting increased pressure on discretionary income, it's unsurprising that general merchandise has suffered in recent months.

And it seems that Tesco's heavier reliance on general merchandise has been the element letting it down.

But, when asked if Sainsbury's should continue to focus on expanding its general merchandise offer at a time when people are spending less on discretionary items, King said that it gave him more reason to accelerate the plans as the stores gave its core customer base the ability to buy non-food conveniently, at a time when petrol prices are rising.

If the difference between Sainsbury's and Tesco's first quarters hinges only on the latter's reliance on general merchandise, it seems surprising that Sainsbury's would continue to push ahead.