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Supermarket chain imposing changes

Sainsbury’s falls to £72 million loss as price war takes toll

Mike Coupe SainsburysSupermarket giant Sainsbury fell to a £72 million loss as the price war and changing shopping habits took their toll.

The company will focus on more smaller format convenience stores and is opening up to two per week. Its online deliveries were up 13% as more shoppers avoided the weekly visit to a store.

It said it will devote more space in its stores to selling clothing and general merchandise where sales are up 9%. The company is “exploring different supermarket formats” and said it sees “great potential in tailoring formats and product ranges to best meet customers’ needs and these will form a blueprint for future investment”.

The company reintroduced Netto through a joint venture to directly compete with discount chains and five stores have opened. It aims to open 15 by the end of the 2015/16 financial year.

“If successful, it will give us access to, and greater understanding of, the discount grocery sector and offer us exposure to an attractive growth channel,” it said.

Taking out layers of management in the group has reduced costs and 800 roles will go across the country.

But customers now earn fewer points on their Nectar loyalty cards and the dividend to shareholders has been slashed.

The company said it had made operating cost savings of £140m in 2014/15 and expects to deliver total operating cost savings of £500m over the next three years.

As forecast by Daily Business at the weekend the company has embarked on a further bout of price cuts and it said today it was already seeing benefits coming through. It has targeted 3,000 own-brand products “that matter most to our customers”.

It said: “We are investing in lowering prices on products where customers have told us that price is most important. We have never been more competitive on price versus our competition and are seeing encouraging early signs of volume and transaction growth.”

Underlying Group sales were down 0.9% to £26.1 billion and the underlying profit before tax down by 14.7% to £681 million.

But the bottom line fell to a loss after revaluing property with has decreased during the year by £900m to £11.1 billion, mainly due to a reduction in market rental values. A charge of £341m has also been recognised in relation to unprofitable and marginally profitable trading stores.

David Tyler, chairman, said: “Sainsbury’s is a business built on strong foundations. With our grocery business at the core, we are confident that we can grow shareholder value through our increasingly multi-channel offer, and by growing businesses across financial services, convenience, online, clothing and general merchandise.

“I am confident that we have the best management team in the sector to lead us through a time of unprecedented industry change.”

Mike Coupe, chief executive (pictured), said: “The UK marketplace is changing faster than at any time in the past 30 years which has impacted our profits, like-for-like sales and market share. However, we are making good progress with our strategy, and our investment in price and quality is showing encouraging early signs of volume and transaction growth.

“We know that our customers still want the best quality food at great prices and our strategy is built on our strong foundations of selling great food with a focus on quality, provenance and sustainability. At the same time, we know that our customers want value for money and we have therefore invested in lowering our prices; our prices versus our competitors have never been better.

“We also have significant opportunities to grow our business. Clothing, general merchandise and financial services have all performed well over the past 12 months, as have our convenience and online channels. We have a significant ambition to grow these areas over the coming years.

“Sainsbury’s is a fantastic business, run by an experienced management team, supported by great colleagues and underpinned by strong values. I believe we are taking the right decisions to ensure we remain fit for the future and are able to capitalise on our many growth opportunities.”

The company is proposing a final dividend of 8.2p (2013: 12.3p) making the full-year payout 13.2p per share, down 23.7%, (17.3p).

John Ibbotson of the retail consultants, Retail Vision, said:  “Compared to Tesco’s £6.4bn bombshell, this pre-tax loss is a relative minnow, but it still reflects the changing narrative within grocery. The monopoly of the Big Four is no more.

“Mike Coupe has brought in change but it’s nowhere near radical enough to tackle the revolution within grocery. He needs to take a lesson out of Dave Lewis’ book and kitchen-sink the whole thing.

“There has to be a lot more urgency or sales and profits will continue to decline. And the more behind the curve Sainsbury’s gets, the sharper the decline will be.

“Tesco have grasped the nettle and made the big decisions, and unless Sainsbury’s does the same the medium to long-term pain will be even worse.

“Mike Coupe’s leadership feels old guard in a new world. The strong values of his company should be applauded but what really matters in today’s market is strong value — and is he delivering that? Right now, it would appear not.”

Paul Thomas of the retail consultancy Retail Remedy says: “Sainsbury’s has become the retail world’s squeezed middle. What began as gentle pressure from both above and below has quickly morphed into an alarming exodus of customers – sending the brand spinning into a full-blown identity crisis.

“Its reputation for quality, sustainability and fair trade goods is incompatible with the price war being waged by its wounded rivals Tesco and Morrisons.

“With lower margins and a greater reliance on food than its bigger rivals, Sainsbury’s can never win a pure price war.”

Edinburgh-based Sainsbury’s Bank delivered sales and profit growth, with operating profit up 17% to £62m.

“We are making good progress against our transition plan albeit total capital costs associated with the transition are expected to increase by between £80m and £120m.”

The company said it sees significant growth opportunities for Sainsbury’s Bank, in particular capitalising on the brand loyalty effect from our customers.

“Last year we saw a 13% increase in the number of Sainsbury’s Bank credit cards being used within our stores. Whilst reduced advertising activity has resulted in overall customer awareness of the bank declining slightly during the year, the number of active accounts held by customers has now reached 1.7 million, an increase of six per cent.

“In a challenging marketplace, we have continued to see sales and profit growth, with operating profit up 17% to £62m and total income up over 13% to £260m.

“In 2014, we grew credit card sales volumes by 50% year-on-year. Our loans business had another very successful year with a 13% year-on-year increase in sales volumes as we continue to provide competitive, best buy table loan rates. Sainsbury’s Bank Travel Money saw like-for-like growth in turnover of 24%.

“In March, we welcomed 574 Travelex colleagues over to Sainsbury’s Bank, a key milestone in our transition strategy to become a standalone bank and opened our 168th Travel Money Bureau.

Despite insurance sales volumes and income declining year-on-year due to increased competition in the car and home markets, new business volumes in pet insurance grew by 64% year-on-year. The bank’s ATM estate grew nearly 7% to 1,575 free-to-use ATMs, seeing over 236 million transactions in 2014/15. Sainsbury’s Bank’s website visitors have also grown by over 12 per cent year-on-year to over two million visits each month.

“Whilst we have made good progress in certain areas of the transition programme in terms of building our new banking platform and planning customer migration, a complex project of this size always brings challenge and we have faced into a number of issues that are likely to impact the end costs.

“Although our transition plans remain on time and in line with budget to date, we see total costs (capital and revenue) for the project going forward rising by between £80m and £120m, taking our overall spend to between £340m and £380m. The smooth migration of savings customers in winter 2015 remains our primary near term objective. “

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