Record-breaking Sainsbury's? Sort of
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Version 0 of 1. A record-breaking Christmas? That was Sainsbury's chief executive Justin King's boast this morning and, if your taste is old-fashioned measures of sales, it's accurate. There was a modest gain in market share and like-for-like sales rose by 0.9% excluding fuel. But it's hardly a moment to crack open the champagne, or even the prosecco. On most measures, Sainsbury's is merely demonstrating the struggle in supermarket-land to generate meaningful growth. Take that 0.9% like-for-like sales figure. It includes extensions to stores, which is really a distortion of the "like-for-like" principle. Ignoring the extension effect, Sainsbury's like-for-like sales growth is more like 0.4%. Then remember that the numbers include price inflation, currently running at just under 3% at Sainsbury's. So, in terms of the volume of goods shifted, the group looks to be down by about 2.5% on a comparable basis if one ignores the "mix" effect of punters trading down to cheaper products. And, since more of Sainsbury's business is now conducted via home delivery and in convenience stores, the fall in like-for-like volumes in traditional supermarkets, or the core estate, is estimated by Investec's analyst Dave McCarthy to be 3%-5%. That's uncomfortable since online shopping, at delivery charges of only a fiver, is clearly less profitable than trade conducted in supermarkets. Time for head the hills? Not quite since it would be silly either to overstate the effect of online shopping or pretend that it doesn't exist. About 90% of Sainsbury's custom is still in its old-style supermarkets. And Sainsbury's clearly has to play the online game since there is demand for it; you'd rather be in its shoes than those of Morrisons, now confronting the consequences of its decade-old aversion to the web. Sainsbury's can also deploy a few self-help tactics. It removes about £100m of costs a year and is successfully pushing shoppers towards own-label goods, including champagne at Christmas. Despite declining sales volumes, pre-tax profits this year should still increase by £40m or so. But the point is that profits jolly well should be improving given the vast capital expenditure bill, which runs at about £1bn a year (almost 1m square feet of trading space will be added this financial year). McCarthy pointed out in a recent note that Sainsbury's market capitalisation (£6.2bn) is close to the total sum of capital it has spent in the last five years (£5.3bn). That's almost the definition of a company that it is having to reinvent itself at rate of knots. Or, in McCarthy's description, Sainsbury's and the other quoted supermarkets are running up an escalator that's going down. Sainsbury's, to give it full credit, is running faster than its major rivals. It is demonstrably outperforming a horrible market for mainstream supermarkets, has the right strategy and has gained market share during King's eight years at the helm. Thank goodness he pledged today to hang around for the "long term", investors might reflect. Quite right, too. But medium-term prospects look rough for everybody. The prize for breaking records is to stand still, and the laggards go backwards. |