A year into its strategy to put food back at the heart of its business, Sainsbury’s has delivered strong profit growth. Yet as the cost-of-living crisis begins to bite, the grocer is faced with unique challenges on top of the hyper-inflationary market

  • In order to curb inflation, Sainsbury’s has rolled out Aldi Price Match across 150 more fresh products
  • The grocery giant has paid suppliers in “acute areas” of inflationary pressure more, to reflect increased costs
  • It is also “moving quickly” towards having 10 million digital users for Nectar rewards

Sainsbury’s reported a 25% increase in underlying profit before tax to £730m during the 52 weeks to March 5. Sales including fuel climbed 2.9% to £29.8bn but were down 2.6% excluding fuel.

Just as market leader Tesco did earlier this month, Sainsbury’s struck a more cautious note on profitability going forwards, revising its earnings outlook for 2022/23 down to £630m-£690m.

Sainsburys results 2022  p13 Retail sales growth by category

Chief executive Simon Roberts insists that while he has never seen anything like the current headwinds facing the sector in his 30-plus years in retail, Sainsbury’s food-first focus has put the grocer in a strong position to navigate the cost-of-living crisis

“Our plan is working, the business is in good shape,” he says. “We’ve never been better on value than we are right now.”

But Roberts’ key drivers of volume – its Aldi Price Match initiative and My Nectar Prices – place it firmly in competition with Tesco, which was first off the mark with similar schemes.

Meanwhile, general merchandise, and Argos in particular, are failing to fire on all cylinders under Sainsbury’s grocery focus and the pressure of international supply chain problems.

How well has Roberts’ strategy positioned Sainsbury’s as inflation and the cost of living crunch start to take their toll? 

Taming inflation

Given the heightened food focus under Roberts’ leadership, it is perhaps no surprise that Sainsbury’s registered strong grocery sales during its financial year – up 7.6% on a two-year basis.

However, with food inflation at 5.9% – an 11-year high – Roberts says Sainsbury’s is raising prices “behind the market” and was keen to emphasise the work the retailer is doing to insulate customers from rising prices at the shelf edge. 

Sainsburys results 2022  p35 Continuing to inflate behind the market

In the past week alone, Sainsbury’s has rolled out its Aldi Price Match to 150 more fresh products and ramped up investment in its Price Lock promotion, fixing the prices of up to 2,000 items for at least eight weeks.

Sainsbury's Aldi price match sign on store shelves; woman carrying basket

Sainsbury’s Aldi Price Match scheme now covers 240 products

Roberts observes that customers are already “being a bit more cautious, watching every penny and every pound”. This behaviour has influenced Sainsbury’s latest investment in the prices of everyday items.

“These are products that customers are putting in their basket week in, week out,” Roberts explains. “Bread, milk, potatoes, salad, vegetables, fruits, meat, fish, dairy products. We’re really focused on those high-volume, regularly purchased items because that’s what customers are telling us really matters to them.”

Although Sainsbury’s Aldi Price Match now stretches across 240 products, that remains significantly less than the 650 products covered by Tesco’s offer. 

When asked if Sainsbury’s had the financial firepower to broaden the price match initiative to a similar number of products, Roberts is keen to avoid comparisons with Tesco. 

“I could quite easily put a basket of 1,000 products in but what we’re trying to do is put the products that customers are really buying often [in the scheme],” he says.

“We’re focused on what products customers are buying from Lidl or Aldi and focusing the investment there. What we’re doing is working as hard as we can to take the reason away to go somewhere else so we can bring that customer shopping trip back to us.”

Supply and innovate

While Roberts refuses to be drawn on the specific levels of price inflation Sainsbury’s is seeing, he says the grocer has been leveraging relationships with suppliers and growing its own-brand food proposition to offset inflationary pressures.

Suppliers and food manufacturers across the UK are feeling the pinch, with costs jumping on everything from energy to fertiliser and animal feed. 

FMCG giant Unilever said this week it has so far covered two-thirds of its increased costs by hiking prices, while a recent survey by the British Free Range Egg Producers Association found more than half of British egg suppliers are considering stopping production due to a lack of supermarket support. 

“We’ll have a real suite of value that’s compelling – we serve you what you expect individually but also give you value across the rest of your shop as well”

Simon Roberts, Sainsbury’s

Roberts says Sainsbury’s has been paying more to suppliers in “acute areas [to] reflect the increased costs” they face. Sainsbury’s has also started paying milk producers monthly instead of quarterly, helping to drive a “meaningful increase” in what those suppliers are paid per hour. 

The grocer has been busily introducing new product lines to appeal to customers across all price points such as its entry-level J. James products in meat and poultry. Roberts says the grocer hit its target of tripling product innovation, introducing 1,950 new lines during the year. 

Its premium-tier own brand Taste the Difference has been given particular attention, with more than 300 new lines added in the past 12 months. That work has borne fruit – Roberts says customers are still “looking to treat themselves” – driving a 15% spike in Taste the Difference sales compared to two years ago.

Sainsbury’s also expanded its meat-free and vegan ranges, including the Plant Pioneers brand, with the addition of more than 70 new products. Roberts believes this represents a “metabolic shift” for the business, which not only taps into the different ways customers are eating but also improves Sainsbury’s value proposition. 

The retailer aims to keep the newness coming, with plans to introduce “hundreds” more products during the summer to capitalise on the platinum jubilee and August bank holidays. Roberts believes the increased costs of dining out will encourage more consumers to eat and socialise at home on such occasions. 

Nectar on amber

Sainsbury’s Nectar loyalty scheme now has 9.3 million digital users and is “moving quickly” towards its 10 million target, Roberts says. More than 1 million shoppers are also using My Nectar Prices promotions. 

Sainsburys results 2022  p45 Nectar growing digital customer base

The initiative gives Nectar members personalised offers every week, something Roberts insists “no one else” in the market is doing. Currently, customers can only benefit from My Nectar Prices through Sainsbury’s in-store SmartShop terminals or the smartphone app.

“We’re really pleased with how that’s going and it’s really clear that customers are valuing that,” Roberts says. “They really like the fact that the value they’re seeing is on products that uniquely relate to them”.

Roberts’ vision for Nectar is for the loyalty scheme to become the “glue that can join together how we serve our customers digitally and in a more personalised way”, across Sainsbury’s and its other brands – Argos, Habitat and Tu, the clothing brand that hit £1bn in sales last year for the first time. 

Using Sainsbury’s own traffic-light grading system, it seems Roberts believes Nectar’s progress is on amber.

Argos at Sainsbury's Nine Elms

Argos is as an area where Sainsbury’s can cut further costs as part of its Save to Invest programme

“We’re really looking to scale that on to our other platforms alongside supporting our Aldi Price Match and Price Lock schemes,” he says. “We’ll have a real suite of value that’s so compelling – we serve you what you expect individually but also give you value across the rest of your shop as well.”

It is a compelling vision, but one that represents another path already being trodden by Tesco. The UK’s biggest grocer has extended its Clubcard Prices offer across general merchandise and the F&F clothing brand, and is more widely used by its customers. 

Tesco has more than 20 million Clubcard members, just over double Sainsbury’s loyalty customers, and 6.6 million of those members use it regularly – more than six times its nearest competitor. 

While Sainsbury’s will not enjoy the comparison, the numbers highlight the level of work required to secure widespread customer loyalty, particularly at a time when the rising cost of living could lure shoppers to Aldi and Lidl. 

Eyes on Argos

Another area of concern for Sainsbury’s is general merchandise, particularly Argos, which suffered a 12.5% slump in sales year on year and a 3% decline on pre-pandemic levels.  

Sainsburys results 2022  p47 General merchandise

While Roberts is keen to emphasise the “encouraging” upwards sales trajectory Argos has recorded during the first quarter of its new fiscal year – and the fact that “more than half” of the benefit of its store restructuring plan has yet to be realised in its numbers – he concedes that trading this year will remain tough. 

“We’re trying to hold inflation back on products that people are buying but I think when we look at the rest of the year on general merchandise, it’s going to be different. Obviously, it’s more discretionary spend and we expect that general merchandise sales will be impacted by that,” Roberts admits. 

Chief financial officer Kevin O’Byrne points out that general merchandise margins are being hit by both increased commodity prices, as well as a material increase in freight costs from countries like China. 

“We’re assuming a slightly lower margin this year because of the price comparative, but across the whole market you’ll see prices going up,” O’Byrne states. “The freight issue is very material for the whole industry and, because most of those products are imported, our freight costs have gone up materially.” 

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Roberts adds that Sainsbury’s financial services platform is offering some synergy for Argos customers – its own buy now, pay later proposition was used by shoppers to cover more than £1bn of Argos orders last year. 

Roberts highlights Argos as an area where Sainsbury’s can cut further costs as part of its ambitious Save to Invest programme.

“We’re reducing the costs, we’re improving the margin; we think we can continue to improve the customer offer over time and we’re working to do that,” Roberts says. “We can see lots of opportunities to drive it despite the fact that, clearly, the environment is challenging.”

Roberts and Sainsbury’s can point to several key metrics from the last year to show the business is making strides in the right direction. Although given it is now competing with Tesco on benchmarking Aldi prices, and is playing catch up on customer loyalty, there is more work to be done. 

With retail heading towards another price war, Argos’ ongoing travails also mean it could be wading into this latest fight with one arm tied behind its back.