Sainsbury’s profits takes inflation and cost of living hit as supermarket faces stark choice
In its full year results for the year ending 4 March 2023, Sainsbury’s pre tax profits fell from £854m to £327m as the retailer battled to keep its pole position as one of the UK’s largest supermarkets.
The supermarket giant said it was impacted by non-cash asset impairments, driven by a higher discount rate, and one-off income from legal settlements in the prior year.
The owner of Argos and the Tu and Habitat brands claimed it had made “bold choices” to help customers battling rising food inflation, which was last estimated at 14.5 per cent.
It said it had needed reduce costs, make Argos and Tu profitable and resilient, grow profits at Nectar and strengthen its balance sheet.
In a statement Sainsbury’s said: “We have reinvested the benefits in our food business, prioritising value, customer service and innovation, which is driving improved market share performance.
“This has also given us the financial flexibility to make balanced choices, investing to help customers and colleagues, while also delivering results at the top end of expectations.”
Retail sales were up 5.2 per cent, two per cent excluding fuel sales while group sales rose by 5.3 per cent.
Grocery sales rose three per cent while underlying profit before tax was £690m, down five per cent on the previous year, but at the top end of £630m to £690m guidance range; Sainsbury said it expected next year’s total to come in between £640m and £700m.
Sainsbury investing in staff wages
Simon Roberts, chief executive of J Sainsbury, said: “We really get how tough life is for so many households right now which is why we are absolutely determined to battle inflation for our customers.
“Our focus on value has never been greater and we have spent over £560 million keeping our prices low over the last two years. As a result, we are now the best value compared to our competitors that we have been in many years and we are delivering improved market share performance in Sainsbury’s and Argos.”
“We are two years into our plan to put food back at the heart of Sainsbury’s and have focused our efforts on reducing costs right across the business, which has enabled us to make the right decisions for our colleagues and customers. At the same time, we have improved the performance and profitability of Argos, Tu, Nectar and Financial Services so that we can invest further in the areas that customers and colleagues care about most.”
Last September Sainsbury’s invested £20m into boosting staff wages and has subsequently raised salaries.
Roberts added: “Our colleagues do a fantastic job serving our customers every day and we know that they are also dealing with the impact of the rising cost of living. That’s why, over the last 12 months, we took the decision to invest £225m supporting colleagues including raising colleague pay three times, becoming the first major supermarket to pay our people the Living Wage across the whole country and providing free food at work and increased colleague discount.
“We continue to work closely with our suppliers and farmers and I am grateful for their support in what has been another difficult year for food supply chains. We know just how vital the agriculture industry is not only to Sainsbury’s, but to the country as a whole and this is why we have made the choice to give £66 million of additional support to British farmers over the last year.
“We made these very deliberate decisions and investments because they make our business stronger, but more importantly because they are simply the right thing to do. While there is still much to be done and there is no doubt that the year ahead will remain challenging, I’m confident we will continue to deliver for our customers, colleagues, communities and shareholders.”
Sainsbury’s facing ‘stark choice’
Victoria Scholar, head of investment at interactive investor, said Sainsbury’s was facing pressure both on the demand and supply side.
She said: “Rising bills for food, energy and wages are putting pressure on operating costs, while demand is also struggling amid the squeeze on household budgets and the fall in real wages across the UK. Nonetheless the outlook is starting to look more positive amid hopes that cost inflation will ease this year.
Scholar added that the “price competitive” Germany discounters Aldi and Lidl gave Sainsbury’s no choice but to keep prices low in order to preserve its market share, rather than passing on additional cost pressures to consumers.
She pointed out Sainsbury’s remained the UK’s second largest supermarket after Tesco whereas Aldi overtook Morrisons to enter the Big Four last year.
Zoe Gillespie, investment manager at RBC Brewin Dolphin, said Sainsbury’s was caught between post-Covid normalisation and high inflation, which are simultaneously reducing revenues and cutting into margins.
“But compared to where it was three years ago, the company is in a much better position. It is a tough environment for supermarkets, which is one of the reasons why Sainsbury’s finds itself among the FTSE 100’s least favoured stocks by analysts. But, it continues to perform reasonably well in the circumstances, with an improving share price, decent balance sheet, and levers to pull – such as the potential sale and lease back of property.”
Orwa Mohamad, analyst at Third Bridge, said UK supermarkets would face more challenges before things started to improve.
“As food inflation in the country hits a 45-year high. As if that wasn’t enough, a new supply chain crisis has emerged, causing fruit and vegetable shortages that make up a whopping 10 per cent of supermarket sales.”
“Our experts expect food inflation to start coming down in H2 of 2023 as we lap comparables from last year due to initial lag in price increases. Supermarkets will be looking to pressure suppliers for price reductions in order to reduce prices for consumers.”
“Sainsbury’s strong position in and customer loyalty in the southeast really helps them in these difficult times. However, further price investment, through Nectar Prices, is needed to fend off discounter threats and keep competitive with Tesco.”
“Nectar Prices seeks to replicate Tesco’s Clubcard, and it’s never a bad thing in any business to plagiarise what your biggest rival is doing well. It will allow Sainsbury’s to improve price perception while increasing operating margins as not all customers will use a Nectar card.”
“Thanks to the return of workers to city centres, Sainsbury’s has a significant opportunity in the convenience sector this summer.”
“Margins are set to improve as inflation comes down, particularly with much of the work done on reducing overheads and increasing productivity during the last year.”
“Investors are closely monitoring any potential interest from private equity firms in Sainsbury’s.”
Shares in J Sainsbury were last trading flat on the FTSE 100 at 282.90p down 0.35 per cent.