Given the poor state of the businesses that Dalton Philips and Philip Clarke inherited, can Mike Coupe be more confident about Sainsbury’s?
Today’s final results from Sainsbury’s are the last from chief executive Justin King and represent his swan song in the City, so it’s a good time to look at just how strong a business his successor Mike Coupe will take over.
King is determined to go out on a high note and, despite the general view that the industry has got a lot tougher, there was no sign of any great caution about the outlook in the Sainsbury statement today, with lots of emphasis on how well “differentiated” the business is. And the excellent finance director John Rogers was able to pluck a nice earnings beat out of his hat, delivering £798m underlying pre-tax profit, versus the £782m that was expected for 2013/14.
But the earnings beat for the year was all about an extra £20m of cost savings from “back of store” activities and the fact that Sainsbury did not choose to nudge the consensus of £762m pre-tax profit for 2014/15, ie a small profit fall, implies that they are also cautious about the outlook at this stage.
With like-for-like sales expected to be no better than flat for the new year, despite a pick-up in performance over Easter, Sainsbury will have to work hard on finding more cost savings just to stand still at the bottom-line and the big debate is therefore about what will happen to gross margins.
King is, of course, famous for saying that much of the promotional activity in the supermarket trade is just part of the normal “cut and thrust” of the industry and he didn’t particularly alter that stance at the analysts meeting today and rather scoffed at the notion that a “price war” was started by Morrison’s last week.
But even if Morrison’s are just playing “catch up” on industry pricing, Sainsbury must be aware that Tesco could yet escalate things further and that if Sainsbury’s like-for-like sales trends continue to fall “back into the pack” then it won’t be able to go to suppliers and claim relative outperformance on product volumes when it come to their gross margin negotiations.
However, if there are a few uncertainties in life for Sainsbury, at least they are fully up to speed in the two key growth channels of the industry, namely online - despite the need for a recent website overhaul - and convenience stores. And Sainsbury’s have the right scale of non-food exposure, a strong own-label quality reputation, a healthy South-East regional base, a robust Nectar-card based loyalty scheme and strong corporate “values” on sourcing and the community.
This is in stark contrast to what Dalton Philips inherited at Morrison’s 4 years ago and with what Philip Clarke was handed at Tesco.
Back in 2010 Morrison’s had no online grocery offer, no convenience store exposure, relatively little South-East exposure and no customer loyalty scheme and the embattled Philips has therefore been running up a down escalator ever since, as its northern heartland has been squeezed by the discounters.
And back in 2011 Tesco was in a pretty shocking state, with the UK business bled dry to finance the foolish escapade in the US, which is why Clarke has been rushing around putting out fires ever since.
Compared to the problems of these two, King should be proud of his legacy and Coupe should be comfortable that he hasn’t been given a hospital pass.
And yet, hindsight is a wonderful thing. It wasn’t obvious four years ago that Morrison’s would soon have such problems and it wasn’t that obvious three years ago that Tesco was about to unravel, so it will be a few years yet before we can really judge how strong a business Coupe has inherited.
About Nick Bubb
Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos “Retail Think-Tank”.
Sainsbury's full-year profits up 5.3% as boss Justin King prepares to bow out
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