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Sainsbury’s cuts annual sales forecast and reviews dividend Sainsbury’s cuts sales forecast and reviews dividend
(about 11 hours later)
Sainsbury’s has cut its forecast for annual sales and is reviewing its dividend after the supermarket group was forced to slash prices in the toughest grocery market for decades. The UK’s supermarkets are facing a “perfect storm” of problems, the new boss of Sainsbury’s said as he revealed a slump in sales and warned that the changes under way in the food retail business were the most challenging he had seen in his 30-year career.
The revision announced by the company’s new chief executive, Mike Coupe, means almost a decade of rising annual sales at Sainsbury’s will come to an end. Just days after announcing a new round of price cuts intended to fend off growing competition from fast-growing discounters including Aldi and Lidl, the Sainsbury’s chief executive, Mike Coupe, said the pace of change in shoppers’ behaviour had accelerated rapidly over the summer.
In a trading update, the group said sales fell more quickly in the second quarter of the financial year and that they would not pick up in the second half. “It’s the most challenging I’ve ever seen the market in my 30 years in retail. A combination of effects have created a perfect storm,” Coupe said.
Sales at stores open for a year or more dropped by 2.8% in the 16 weeks to 27 September, excluding fuel, compared with a 1.1% fall in the previous three months. Sainsbury’s said it expected second-half like-for-like sales to be similar. A sea change in shoppers’ behaviour is under way, the scale of which some retail executives and analysts have likened to the arrival of self-service supermarkets in the 1960s.
The supermarket had previously predicted that like-for-like sales would pick up in the second half, and that they would rise slightly for the full year. The revised guidance means annual sales will now fall. Tesco, Morrisons and Sainsbury’s are all seeing sales decline sharply as customers shun superstores and big weekly shopping expeditions in favour of shopping more locally and more often. They are also looking for better deals, trying new retailers, buying less and wasting less. Online shopping is also growing rapidly.
Sainsbury’s shares fell 3.5% to 243p, their lowest since the depths of the financial crisis in October 2008. The gloomy updated dragged rivals Morrisons down 4% and Tesco down 2.7%. Those trends are boosting the discounters – especially Aldi, Lidl and Poundland – and convenience stores, rather than the traditional big supermarkets.
In his first presentation as chief executive, Coupe said the grocery market had changed more quickly in his 84 days in the CEO’s chair than he had seen in his 30 years in the industry. Shoppers are making smaller purchases, prices are falling and people are spending any money they save on eating out, he said. Asda is the only one of the big four grocers gaining market share – and its gains are tiny compared with those of the discounters. The Walmart-owned chain cut its prices sooner than its rivals, which are only now realising they must respond.
Coupe has launched a review of Sainsbury’s entire business, including its dividend policy, and will update investors in November. “These are trends that are here to stay,” said Coupe. “Customers have never been more savvy or shopping around more.”
“We are in a very dynamic market at the moment and we are looking at all aspects of our business. We will leave no stone unturned,” Coupe said. “The rate of change going on in the marketplace is something we will be thinking very carefully about over the next six weeks.” It was Coupe’s first update to the City since he replaced Justin King as boss in July.
Sainsbury’s finance director, John Rogers, said: “If we are doing a full-scale strategic review with no stone unturned you would expect the dividend to be part of that full-scale review.” Some analysts have said all three listed supermarkets might have to cut their dividends to take account of falling profitability. He said Sainsbury’s was carrying out a complete review of its business to find a way to fight back: “We are looking at all aspects of our business. We will leave no stone unturned.”
The sense of crisis in the sector increased last week when Tesco revealed it had overstated its expected first-half profits by £250m. Sainsbury’s bigger rival blamed incorrect accounting of commercial revenues from suppliers for most of the accounting shambles, which the Financial Conduct Authority is investigating. The company said it was not standing still in the face of new competition but was opening more convenience stores and improving its online service, both of which were seeing sales rise. It also plans to fight the discounters head on through a deal with the Danish discounter Netto to open Netto shops in the UK. The first five will open at the beginning of next month.
Coupe, Sainsbury’s commercial director until becoming chief executive, and Rogers said they were “100% confident” that Sainsbury’s had accounted for promotional income correctly. Rogers said there was “a gross misrepresentation” that retailers had lots of leeway about how and when to record the revenues and that the accounting rules were clearly defined. However, more than £1bn was wiped off the value of the UK’s three publicly listed supermarkets – Sainsbury’s, Morrisons and Tesco – yesterday as Coupe admitted that Sainsbury’s takings would continue to decline in the coming months.
Sainsbury’s has withstood the onslaught from German discounters Aldi and Lidl more successfully than its rivals Tesco and Morrisons by treading a fine line between price and quality, but with the wider grocery market stagnant and cash-strapped consumers searching for bargains, it has been forced to join the price war in the sector. Sainsbury’s shares slumped nearly 7% to their lowest level in 11 years. Retail analysts at the City broker Shore Capital slashed their full-year profits forecasts for Sainsbury’s by 17% to £650m.
Coupe said he had cut basic prices on thousands of food items and would do away with confusing promotions. He has also simplified Sainsbury’s pledge to match Asda prices even when its rival, which shoppers view as the cheapest supermarket, has a promotion. If Sainsbury’s shares fall just 17p from yesterday’s 234p close, they will be back to their level in 1989.
Coupe, who took over in July from his celebrated predeccessor, Justin King, refused to comment on whether price competition was a skirmish, as King had described it. City analysts had expected Sainsbury’s to be hit by the sector’s malaise and had forecast like-for-like sales down between 3% and 4%. Investors have also been spooked by the £250m accounting scandal at Tesco in relation to the allocation of payments from suppliers, which is being investigated by the City watchdog.
But Coupe and Sainsbury’s finance chief, John Rogers, insisted they were “100% confident” that Sainsbury’s had accounted for promotional income correctly. Rogers said it was “a gross misrepresentation” that retailers had lots of leeway about how and when to record such income. The accounting rules, he insisted, were clearly defined.
Retail experts had been braced for bad news on sales and Sainsbury’s confirmed those fears. Like-for-like sales – which measure only stores open for a full year to exclude gains made from opening new shopfloor space – dropped by 2.8% over the past four months. In the previous three months, sales declined by 1.1%. Before that Sainsbury’s had recorded nine years of unbroken quarterly sales growth.
Coupe insisted that Sainsbury’s was outperforming Tesco and Morrisons, both of which have seen sales dive more sharply. But Darren Shirley, an analyst at Shore Capital, said this was hardly an achievement. “Should Sainsbury’s be comparing itself with the two weakest performers in the market?” he asked
Morrisons has been forced to accept a 50% cut in its profits in order to slash prices on more than 1,200 items after it began losing sales to discount stores. Tesco is in turmoil after replacing its chief executive and finance director after a big slump in performance in the UK and overseas. The UK’s biggest retailer has found itself hindered by its reliance on very large supermarkets which are now out of fashion.
“You could argue that with Tesco underperforming to that degree, Sainsbury’s should be benefiting – and they are not,” Shirley said.