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Sainsbury's feels the squeeze

Analysts and investors were disappointed by poor second quarter trading at supermarket Sainsbury.
October 1, 2014

Sainsbury (SBRY) is feeling the squeeze, and we doubt new chief executive Mike Coupe is all too happy about it. Britain’s third-largest supermarket chain revealed second quarter retail sales fell 0.8 per cent, excluding fuel, with like-for-like sales down 2.8 per cent on the same basis. In the first six months of the financial year, retail sales were flat, but down 1.4 per cent including fuel.

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Management blamed the escalating price war in the grocery market, as well as the popularity of convenience shopping amongst customers. Mr Coupe said this had led to “smaller basket sizes” and “deflation” in many areas of the group’s food business. It is likely these pressures will persist for Sainsbury’s, and management warned second half like-for-like sales would be similar to the first six months performance.

Although the rise of the convenience shopper has hurt trading, Sainsbury’s is trying to better serve this type of customer. It opened 23 convenience stores in the second quarter, and refurbished a further 10, helping boost convenience store sales by 17 per cent. Overall, the group hopes to open 750,000 square feet of new space this year, including two new convenience stores per week on average. Management said its priority was serving customers “in the channel of their choice”.

But there’s no doubt Sainsbury’s finds itself at the heart of a discounting war, and has tried its best not to fall behind. After customers informed the supermarket they found its promotions ‘confusing’, Sainsbury’s responded by lowering prices on “thousands” of lines and simplifying its Brand Match promise to make it clear it matches rival grocer Asda's prices - even when they are on promotion too.

Encouragingly, sales of clothing and general merchandise are faring better. The group’s clothing brand Tu celebrated its tenth anniversary during the second quarter, and the launch of its largest ever collection helped drive double-digit sales growth. Sainsbury’s is keen to stand out from its supermarket competitors, and said its “differentiated” selection of products helped it win five Retail Industry Awards last week.