Sainsbury becomes UK’s sick grocer

Britons tucked into J. Sainsbury Plc’s value-priced turkey crowns, costing 9 pounds, over the festive period. But its disappointing performance risks turning the group itself into the feast for Britain’s other big supermarkets.
Sainsbury said like-for-like sales across the group fell 1.1 percent in 15 weeks to January 5, missing analysts’ expectations for a 0.3 percent decline. True, the reporting period includes October and November, which were dismal for British retailers — worth bearing in mind when comparing the chain to the rocketship performance of Aldi, which focused on the much-better week before Christmas.
But Sainsbury usually benefits over the holidays, as customers trade up to its higher-end Taste the Difference mince pies and bronze free-range turkeys. This didn’t happen to the same extent this year. Although the volume of sales held up, lower food price inflation and a trend of shoppers trading down to cheaper products meant the average value per item fell.
Like-for-like grocery sales were slightly positive. However, Argos’s sales were below expectations, and that’s despite the removal of capacity from the market during 2018 as some rivals either disappeared or closed stores.
When inflation moderates, or there is deflation, grocers need to sell more tins of beans or loaves of bread to generate the same value of sales. That’s a tall order, particularly when the UK arms of Aldi and Lidl are taking much of the oxygen out of the market.
In a low growth environment, the big four need to steal sales from a weaker player. In past, that has been Tesco and Wm Morrison Supermarkets Now, it looks increasingly like Sainsbury is about to step into the role. On top of this, the risks are rising.
Firstly, its $8.9 billion takeover of Walmart Inc.’s UK grocer, Asda, is undergoing scrutiny by competition authorities. Approval hangs in part on whether whether regulators break with tradition and class the German discounters as a decent alternative for a significant number of shoppers. Unless officials fall in step with the times, and recognise the threat from Aldi and Lidl, they would have grounds to block the deal, or allow it only with punitive store disposals.
But even if the takeover does get approved, Sainsbury Chief Executive Officer Mike Coupe must then meld the two grocers together. That integration could prove a big distraction.
Shares in Sainsbury had a decent run in the wake of the merger announcement, which looked like another canny deal for Coupe. But they have suffered since.
For the shares to rerate, Coupe must show that the service and stock availability problems that dogged the group in the summer are well and truly behind it. Though he said operations had returned to normal over the festive period, investors need to see that continue.
—Bloomberg