Sainsbury’s mean business

Sainsbury's sign
By Reidar Molthe

3 October 2019 11:32

Sainsbury’s mean business

Mike Coupe, CEO from 2014, has been under hard pressure since Britain’s competition regulator in April blocked Sainsbury’s 7.3-billion-pound agreed bid for Walmart daughter Asda. That pressure has cost shareholders 33 percent in reduced shareholder value so far in 2019.

Alongside slightly improved quarterly sales figures, Sainsbury’s has warned that its first half pre-tax profits will fall due to the impact of unseasonal weather and higher marketing costs.

Over the 12 weeks to 21 September, like-for-like sales across both Sainsbury’s and its Argos were down 0.2%, compared to a 1.6% fall in its first quarter, the company says.

Several new CEO candidates?

“I’m committed to the business and there’s plenty that we need to do over the next period of time,” Coupe told reporters hosting a capital markets day event for investors at a Sainsbury’s store in Southampton, southern England, Wednesday 25 September.

The investor event featured presentations from three of the executives many analysts predict as internal candidates to succeed Coupe - group chief financial officer Kevin O’Byrne, retail and operations director Simon Roberts and food commercial director Paul Mills-Hicks.

John Rogers, CEO of Sainsbury’s general merchandise unit Argos, is also seen as a potential candidate to the position.

Cost cutting

Sainsbury’s put cost cutting and paying off debt at the heart of a plan to show it can prosper on its own after the failure of the Asda deal.

No Asda and Sainsburys deal, says CMA

The proposed £12 billion merger of Sainsbury’s (J Sainsbury plc), and Asda (Walmart) could lead to higher prices, a poorer shopping experience and reductions in the range and quality of products offered, fears The Competition & Markets Authority (CMA) in UK.

The plan also involves moving more Argos stores into Sainsbury’s supermarkets, increasing its number of convenience stores and refocusing the group’s financial services business. Mike Coupe stress several main points:

  • We are confident that we can grow sales and sustainably fund investment in our value, service, store estate and digital proposition.
  • We are more competitive on price than we have ever been.
  • J James is our most developed private label range, with 24 meat, fish and poultry products. Customers are either switching their spending in this category to us from competitors and/ or increasing their overall category spend. 
  • We have a strong track record in reducing operating costs and have an additional unique opportunity to structurally reduce costs as we bring our businesses together.
  • Customers recognize Sainsbury's for the quality of its products and its distinctive ranges, and we continue to grow sales from new and distinctive brands that are exclusive to Sainsbury's.
  • We are also investing to improve the appeal of our supermarkets and make them more convenient, by increasing our ranges in areas such as beauty, wellness and Food to Go.
  • Our new store operating model and investments in technology are delivering consistent improvements in store standards and customer service while lowering our costs.
  • We will invest to improve more than 450 supermarkets; 200 convenience stores and 250 Argos stores this year.
  • We have invested heavily in our digital platform and capabilities, creating a source of growing competitive advantage as we actively progress the integration of our digital and physical propositions.
  • Integrating our assets will enable us to serve customers whenever and however they want.

Big yawns and big questions

The market received Mike Coup's optimistic tone on the capital market day with a big yawn. In short, this means that the market has little faith in Coupe's claims.

Several questions may be asked:

  • Is Sainsbury efficient enough compared to its competitors?
  • Has Sainsbury's really enhanced their competitiveness to the extent Coupe claims?
  • Is the company's private label range as popular as it is alleged in the quarterly report?
  • How convenient are Sainsbury’s supermarkets really?
  • Competitors are also investing heavily in tech. It's probably just a hygiene factor. You must do it to keep up.
  • Several of Coupe's claims are just allegations. Therefore, confidence in the company remains weak among investors.

It is not enough to come up with a long list of pranks, in fact Sainsbury must prove in practice that competitiveness is better than ever. When and if the market believes it, the shares will develop strongly.

The stock has a long way to go before it again reaches values 12 months ago. Trading at a low PE of 10 (Walmart 25, Carrefour 15) it might be a good time to put some bets on Sainsbury’s?

This only make sense if you believe in Mike Coupe of course, and that he can tackle the competition from German discounters in the future.

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