Sainsbury to cut costs as pound squeezes grocers

Bloomberg

J Sainsbury Plc said it’s cutting costs in an effort to avoid raising prices in response to the drop in the pound, after sales fell in its core grocery business.
British supermarket chains have begun raising prices for the first time in more than two years as the slide in sterling since the U.K. voted to leave the European Union drives up sourcing costs. Same-store sales in Sainsbury’s grocery business fell 0.5 percent in the fourth quarter, excluding fuel, missing analyst estimates for 0.1 percent growth.
“We entered the quarter with deflation and exited with inflation,” Chief Executive Officer Mike Coupe said on a call with reporters. “We’ve done a lot to mitigate cost price pressures in our supply chain and we must keep doing everything we can to offer competitive prices.”
Sainsbury’s warning of the effects of the weaker pound adds to evidence of a Brexit-induced cost squeeze among U.K. retailers. Rivals Wm Morrison Supermarkets Plc and Waitrose recently warned that grocers would be unable to cover all the costs of the pound’s fall through price increases, raising the prospect of thinner profit margins. Sainsbury said it was comfortable with a full-year consensus pretax profit estimate of 578 million pounds ($709 million).
Productivity, Sourcing
Coupe said cost-cutting measures include working with suppliers to boost productivity and re-thinking where the grocer sources products. The London-based retailer this month cut 400 jobs and altered working hours for thousands of other workers. Sainsbury has a three-year cost-savings target of 500 million pounds beginning in 2018.
U.K. grocers have been yearning for the end of deflation, but analysts say soft retail conditions and competition from discounters Aldi and Lidl mean they won’t be able to raise prices as much as costs are increasing. The weak pound creates an additional headache for Sainsbury as the majority of Argos’s products are sourced from suppliers in Asia.
Sales growth at the general-merchandise chain helped offset the decline in Sainsbury’s core grocery business. The release of the Nintendo Switch gaming console and strong demand for SIM-free mobile phones helped same-store sales rise by 4.3 percent, beating analysts’ estimates for a 1.9 percent increase.
“Where there is newness, customers are still buying products,” Coupe said.
Sainsbury shares were little changed at 271 pence at 8:45 a.m. in London after earlier falling as much as 3.1 percent.