Sainsbury’s braced for first loss in a decade as supermarkets move to downsize

 

It is early on a weekday morning, and the first wave of customers are yet to arrive at Sainsbury’s revamped store in Wandsworth – its aisles stacked high with everything from garden furniture to Le Creuset-style saucepans and memory foam pillows as well as groceries. 

 

Palatial in size, the store spans 80,000 square feet after its recent extension – twice the size of an average Sainsbury’s supermarket – with an escalator that leads to a mezzanine floor dedicated to its clothing brand Tu.

 

In an age when Britons are turning their backs on larger stores and the UK’s supermarket sector is scrambling to downsize, the expansion at Wandsworth stands out as a direct contradiction to that trend. 

 

Like its supermarket rivals, Sainsbury’s has taken millions of pounds of write-downs on the value of its property portfolio. Bigger no longer means better, and supermarkets are having to come up with more creative ways to keep their large stores relevant. 

 

Yet speaking at the store last month, the grocer’s chief finance officer John Rogers said that the expanded site showed how the company is fighting back and trying to use space to its advantage. The revamp has resulted in a new store let to Sports Direct and a Premier Inn hotel, which Rogers said will help boost the value of its estate. 

 

Sainsbury’s is carrying out similar schemes in Fulham, where it will deliver riverside flats and a newly revamped store, as well as in Ladbroke Grove and Whitechapel. Elsewhere, the company is partnering with retailers, including Jessops and Argos, to introduce concessions into its larger supermarkets. 

 

These measures, being trialled in one form or another by all the food retailers, are sensible. But they come a little too late for a sector that spent most of the 1990s and 2000s competing in a race for space. 

 

In November, analysts at Goldman Sachs issued a note warning that Sainsbury’s, Tesco and Morrisons must cut space by around 20 per cent by 2020 in order to survive in today’s tough retail landscape, where discounters Aldi and Lidl are grabbing a greater share of the market. 

 

Excess space will also prove to have dearly cost Sainsbury’s this year, as the retailer is expected to report its first annual pretax loss in a decade tomorrow, in the wake of £628m of write-downs on the value of stores and sites that it no longer plans to develop.

 

The space conundrum, however, is not the only problem facing the company. The industry price war finally caught up with the group last year, as nine years of uninterrupted sales growth abruptly came to a halt. 

 

In March, the firm reported a 1.9 per cent fall in fourth-quarter like-for-like sales, a fifth straight quarterly decline, as it battled with food price deflation and intense competition brought on by the rise of the discounters.

 

Chief executive Mike Coupe vowed last November to fight back with price cuts of £150m, simpler promotions and a focus on product quality, as well as expansion of its non-food, online and convenience business. The company has also taken on the discounters by launching a joint venture with Dansk to return Netto to the UK.

 

Kantar data shows that Sainsbury’s is still faring better than most, with its sales growth ahead of the big three on a two-year basis. 

 

However, analysts are concerned that Tesco’s turnaround under chief executive Dave Lewis will hit Sainsbury’s harder than it has anticipated, despite Coupe playing down these fears as nothing it hasn’t faced before. 

 

Tesco’s resurgence has been largely to blame for Sainsbury’s recent share price decline, and as the most leveraged UK food retailer, its profitability would have the most to lose. 

 

“We remain unconvinced that Sainsbury’s has the strategy to overcome its relative scale disadvantage versus Tesco, deteriorating industry conditions and a challenged balance sheet,” said HSBC’s David McCarthy.

 

With the price war intensifying, next year is only likely to get harder, with Jefferies forecasting a two per cent decline in like-for-like sales. Shore Capital’s Clive Black warned that Sainsbury’s £150m annual cuts, against £200m-£300m by Asda and £300m by Morrisons, may not be enough to stay competitive and win shoppers’ loyalty.

 

“The brand’s relative price value score may deteriorate, not just against its major value-based competitors but also against the likes of Waitrose, which seeks to match Tesco UK proprietary brand prices,” said Black .

 

Still, others are bullish about its prospects. “We believe the market is not giving Sainsbury’s enough credit for its quality differentiation, how that reduces the cost of a potential price war and how such a price war will make Sainsbury’s more appealing to quality-seeking customers,” said Bernstein’s Bruno Monteyne.

 

-1.9% like-for-like sales in its latest quarter   -15% y-on-y fall in share price   -17% expected slide in full-year pre-tax profits