(Image: Sainsbury's)
Christmas is shaping up to be the first big test of the post-Argos Sainsbury's as the supermarket group accepts slower sales growth in pursuit of a strategy to defend its value credentials.
Sainsbury’s is betting that competitive prices can keep volumes growing and win market share without sacrificing profits, although weaker-than-expected sales during the six months to September 12 underlined the risks of this game plan.
Excluding fuel, the group reported a 2.6% rise to £14 billion in revenue from continuing operations, with grocery sales rising 2.9% to £13.2bn. Underlying operating profit rose at the slightly faster rate of 3.6% to £525 million, while underlying profit before tax increased 5.2% to £366m.
Management was confident enough to raise the bottom end of its full-year guidance. After adjusting its previous guidance to exclude Argos, Sainsbury's raised the lower end of its forecast for underlying operating profit from £965m to £1.025bn, while retaining an upper end of £1.065bn.
Yet like-for-like sales excluding fuel increased by just 1.2% in the second quarter, down from 2.3% in the first. Lucy Rumbold, equity research analyst at Quilter Cheviot, said analysts had been looking for growth of 1.9%, while both grocery and general merchandise performed more weakly than expected.
“It’s worth noting that inflationary pressures stemming from developments in the Middle East have taken longer than initially expected to feed across European markets," she said. "Grocers such as Sainsbury’s have therefore kept price growth below headline inflation to protect their value proposition, which has seemingly weighed on like-for-like sales."
Read more:
Sainsbury's value proposition increasingly rests on Nectar Prices, now covering almost 11,000 products, and its Aldi Price Match programme, as it seeks to keep prices competitive while growing volumes.
That makes the sales slowdown more complicated than it first appears. Ms Rumbold said this appears a "sensible strategy".
"If Sainsbury’s continues to resonate with households on value for money, it should be well-positioned to benefit as inflation is eventually passed through," she added. "We expect this to become more evident towards year-end, as higher fertiliser costs feed through and lower-cost inventory is depleted.”
Sainsbury’s has agreed to sell Argos to Swift Partners as it seeks to create a simpler, more focused food business (Image: PA)
So far, Sainsbury's has managed to protect profit growth, but the forthcoming separation from Argos raises the stakes. The retailer agreed in July to sell the business to Swift Partners and now treats it as a discontinued operation, leaving the investment case increasingly dependent on food and a strategy that has been several years in the making.
“As we progress the sale of Argos and further sharpen our focus on food, we are building a simpler, more focused Sainsbury's," chief executive Simon Roberts said. "With great value, outstanding quality and exciting new food across our ranges, we’re looking forward to helping customers enjoy a really special Christmas.”
There are signs that the food proposition is finding its mark. Sainsbury's says Taste the Difference sales increased by more than 6%, while fresh food sales rose 4.3%. It is also pressing ahead with investment in supermarkets, having upgraded more than 170 stores during the half.
Read more:
Against that, general merchandise and clothing sales fell 3.4%, while Argos sales were down 1.8% across the half and by 2.7% in the second quarter.
The question heading into Christmas is whether Sainsbury's can continue growing volumes through competitive pricing while leaving enough room for profits to advance.
It has pulled off that balancing act so far, but with management acknowledging that the grocery market will remain highly competitive, Christmas provides a tougher test. Once Argos is gone, there will be far less ambiguity about whether Sainsbury's increasingly food-focused strategy is delivering.