Sainsbury’s has posted a slump in profits, as the UK's third-largest supermarket cuts prices and improves the quality of its food to combat mounting competition from discounters.
Price reductions will amount to £150 million, London-based Sainsbury's said in a statement, also unveiling plans to improve the quality of 3,000 own-brand items.
The investment will be accompanied by a probable dividend cut, reduced capital spending and £500 million of cost cuts over the next three years, the company said.
Sainsbury anticipates “years” of negative same-store sales growth for the industry, as more shoppers seek out convenience and better prices.
The company will increase its non-food offering and team up with concession partners in some supermarkets, as discounters grab a larger share of shopper spending and market-leader Tesco’s new management considers measures to revive sales.
"The establishment of a war chest to fund price investment might help mitigate some advances by the German discounters,” said Bryan Roberts, an analyst at Kantar Retail in London. “Concerns remain that Sainsbury’s will be first in the firing line when the sleeping giant Tesco reawakens.”
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"We don’t think Sainsbury is being very bold on prices,” Citigroup analyst Pradeep Pratti said in a note, particularly in comparison with Morrisons, which earlier this year announced one billion pounds of discounts over three years.
Prices will be cut in “areas where our customers tell us it matters most,” CEO Mike Coupe said in a statement. “Our prices have never been sharper.”
Coupe, who succeeded Justin King as CEO in July, said that the supermarket industry is facing “a once-in-a-generation combination of cyclical and structural change”. Customers are shopping more frequently and increasingly using online, convenience and discount channels, he said.
In addition to cutting prices and investing in product quality, Sainsbury's will reallocate space to non-food items and partner with other retailers to open concessions in about a quarter of the grocer’s stores over the next five years.
Last month, Sainsbury’s announced that it would open Jessops camera outlets within its supermarkets. The retailer also plans to slash capital spending, following in the footsteps of Tesco and Morrisons, as grocers abandon a space race that defined the industry for two decades.
On Sainsbury’s interim results, David Gray, retail analyst at Planet Retail, commented, “This morning’s numbers underline the extent to which Sainsbury’s competitive position has deteriorated sharply in a market undergoing seismic structural shifts. The twin threats of falling or flat industry food volumes alongside the seemingly unstoppable growth of the hard discounters are now hitting the company's performance hard."
Bloomberg News, edited by ESM
