As Costcutter-owner Bestway takes a stake, Sainsbury’s finds itself holding a challenging middle-market position between the discounters at one end, and Waitrose and Marks & Spencer at the other. Retail Week’s Prospect analysts explore five ways Sainsbury’s will differentiate itself in a fiercely competitive market.

In an intensely competitive sector, Sainsbury’s has come under mounting pressure from discounters Aldi and Lidl, as well as major supermarket rivals Tesco, Asda and Morrisons as each hones its value credentials and aims to differentiate to appeal to increasingly cash-strapped consumers.

Not only has Sainsbury’s arguably traditionally trailed a step behind grocery behemoth Tesco when it comes to implementing new ideas, but its mid-market position between Aldi and Lidl at the value-end of the spectrum, and Waitrose and Marks & Spencer at the premium end, puts it in the squeezed-middle territory. 

Sainsbury’s chief executive Simon Roberts is laser-focused on simplifying the business and reducing costs to invest in lower prices as he drives forward his Food First strategy, while implementing initiatives that benefit shoppers and staff.

The grocer attributed its strong festive performance to its investment in value, innovation and product availability. But when inflation begins to stabilise and eventually reduce, will Sainsbury’s be poised to grasp the opportunities that will arise? 

Our Prospect analysts explore five ways the supermarket chain is differentiating itself in a fiercely competitive market.

1. Food-first focus

Sainsbury’s is leaning into its core strengths to maximise opportunities in areas it understands best. Since late 2020, Roberts has refocused the retailer’s strategy on its core grocery business, “putting food back at the heart of Sainsbury’s”.

This includes accelerating food innovation to triple the number of new product launches and profitably growing the online grocery channel.

The strategy appears to be bearing fruit with grocery performing well over Christmas. Grocery sales rose 5.6% year on year for the 16 weeks to January 7, 2023, up 12.5% on pre-pandemic levels. 

Full-year total grocery sales have held at a consistent level of some £21bn annually over the past two years and moving ahead its share of sales should grow as the retailer invests in food. However, Sainsbury’s will need to work harder to win consumers’ repeat spend and increase basket sizes, particularly online.

 

Sainsbury’s online grocery sales declined 17.4% year on year for the 28 weeks to September 17, 2022, as consumers returned to stores, but remained up 88.5% against pre-pandemic levels.

Online accounted for 17% of total grocery sales and notched up an average of 690,000 orders per week for 2021/22, which although a robust performance leaves room for growth.

Sainsbury’s faces a battle to grow the appeal of its fresh food offer and entice shoppers away from its rivals, having historically lagged behind Tesco in online grocery share. 

Although currently still high, inflation is anticipated to reduce during the second half of the year, creating an opportunity for Sainsbury’s with consumers potentially seeking a wider choice of products beyond that offered by discounters, particularly in fresh food.

Sainsbury’s has been innovating its own-brand offer and launched 300 new products for Christmas 2022, including 145 Taste the Difference products. 

It claimed a strong performance over the period on fresh food products “with market share outperformance in meat, fish and poultry, and fruit and vegetables”, according to Nielsen data, and its own brand sales were up 10% year on year for the six weeks to January 7, 2023.

As well as helping differentiate it from the discounters, bold product innovation could also help Sainsbury’s steal a march over rival Morrisons with the latter’s performance having faltered in challenging trading conditions.

From a service perspective, Sainsbury’s has focused on initiatives to grow grocery online including releasing online home-delivery slots for Christmas 2022/23 five weeks earlier than the previous year and allowing consumers to book slots on Christmas Eve for the first time.

And earlier this month it added Just Eat to its rapid delivery partners, which already included UberEats and Deliveroo, as well as its in-house service Chop Chop.

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Argos enjoyed a stellar Christmas as customers used pick-up points in Sainsbury’s stores to avoid Royal Mail delays

2. Making Argos and Tu fit 

Sainsbury’s acquisition of Argos for £1.4bn in September 2016 broadened its product range and strengthened its multichannel proposition. Its sales spiked during the pandemic as people purchased home improvement and gardening products before picking up their items from Argos stores and collection points in Sainsbury’s.

However, Argos, which has contributed an average of around 14.8% of Sainsbury’s total sales on an annual basis for the past five years, has not been immune to challenges across the general merchandise sector. Consumer demand has been unreliable and product availability impacted by market-wide global supply chain issues.

 

Despite these challenges, Argos had a stellar Christmas 2022 with consumers keen to get their Christmas presents in time, avoiding delivery delays amid postal strike action by collecting in-store. Argos sales delivered 5.4% growth for the 16 weeks to January 7 and spiked 7.1% for the six weeks to January 7.

While Argos’ bumper Christmas reinforced its multichannel strengths, its sales remained down on pre-pandemic levels, indicating there is ground to cover. Tough business calls are being made too, with Argos set to end operations in Ireland in the summer of 2023, closing 34 stores, as it decides where best to invest.

 

Although food is top of its agenda, now is arguably the time for Sainsbury’s to be bold with its general merchandise business. Aldi’s winding down of its home-delivery service for its general merchandise Specialbuys in 2023 leaves room for Argos to use its fulfilment infrastructure to scoop up customers seeking the convenience of doorstep deliveries.

Share could also be gained as online giant Amazon’s performance stutters. Sainsbury’s physical estate is a huge advantage as consumers seek the reliability and experience of bricks-and-mortar shopping.

Sainsbury’s non-food online proposition could also be elevated through new third-party tie-ups, broadening its product assortment while keeping overheads down.

To bolster its proprietary Tu clothing offer, Sainsbury’s is following Marks & Spencer and Next by expanding its online fashion partnerships. Through a new tie-up with fashion pureplay Sosandar, a selected range of Sosandar clothes will be sold through Sainsbury’s online channel in 2023, before being sold in some stores later in the year.

In the experienced hands of former John Lewis managing director Paula Nickolds, who was appointed Sainsbury’s general merchandise and clothing commercial director in June 2021, Sainsbury’s fashion business could prove a key growth driver.

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In November 2022, Sainsbury’s introduced a checkout-free payment option in stores allowing customers to pay via smartphone

3. Smarter stores add value and convenience

Sainsbury’s has worked hard in recent years to create “smarter stores” and continues to digitise day-to-day processes.

Innovating with the use of mobile devices for in-store scanning and enhancing its frictionless checkout technology, the grocer has further developed its SmartShop app.

In November 2022, it introduced a new payment option, using Checkout.com technology, to allow customers to scan products and pay using their phones bypassing tills entirely.

The launch proved timely, not only modernising and simplifying the grocer’s payments infrastructure and making shopping more convenient for customers, but also helping them track spending and clinch savings through My Nectar Prices’ personalised discounts.

Although the participation of SmartShop in stores with the handsets was slightly down year on year for 2021/22, it remained ahead of pre-pandemic levels.

 

Technology is also being used to help inform consumers’ buying decisions. Innovating in-store, Sainsbury’s partnered with L’Oréal in December 2022 to offer AI-powered skincare consultations using its ModiFace technology.

Shoppers across 100 Sainsbury’s stores can access personalised skincare consultations and product recommendations via iPads loaded with AI skincare tech.

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In January, Sainsbury’s pledged to boost shopfloor staff pay to at least £11 an hour

4. Investing in price and staff to stay competitive

With the threat of worker shortages and industrial unrest still hanging over employers, Sainsbury’s was not far behind its rivals in offering a more competitive staff package. 

In January it announced plans to boost shopfloor staff pay for Sainsbury’s and Argos staff to at least £11 an hour (£11.95 in London), bringing its annual pay review forward by a month. The increase will impact 127,000 store and distribution centre employees.

It will cost the grocer £185m and is part of an overall £205m investment in wages by Sainsbury’s, which has also committed to an additional six months of free food for employees in stores and depots. 

Supporting and retaining staff with these initiatives will strengthen the business. However, management will need to keep a handle on the retailer’s cost-to-sales ratio, which in recent years has been above the levels of Tesco and Morrisons, and broadly on par with Asda.

 

Sainsbury’s has also been helping customers through the cost-of-living crisis and in December 2022 pledged to invest a further £50m into keeping prices low by March 2023, taking its two-year total above £550m, which is 10% above the £500m that was originally pledged in May 2022.

Supporting shoppers, while also battling against the march on market share being made by the discounters, Sainsbury’s recently increased its Aldi Price Match to around 310 items but, according to the Retail Week Grocery Inflation Report, this lags behind Tesco, which matches some 600 products to Aldi.   

Additionally, Sainsbury’s Price Lock initiative fixes the price on a range of household essentials and customers can receive personalised offers through My Nectar Prices. 

On the one hand, these echo initiatives already offered at Tesco and will help Sainsbury’s compete. On the other, Sainsbury’s will need to find ways to differentiate its proposition and stand out by leveraging its strengths and differences, such as its online clothing and general merchandise business.

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Sainsbury’s Price Lock fixes the price on a range of household essentials

5. Back in the black and profit building

Sainsbury’s reported an increase in group sales to £29.9bn for 2021/22 (+2.9%), with the retail business (including fuel) accounting for £29.5bn.

Group like-for-like sales, excluding fuel and including Argos, were down 2.3% in 2021/22 impacted by lower general merchandise sales.

Sainsbury’s bottom line has been dented in recent years by costs including those associated with the Argos integration and outgoings linked to its failed merger with Asda.

 

However, as it hailed a “record Christmas” for 2022, and despite maintaining some caution regarding the “consumer backdrop”, Sainsbury’s raised its underlying pre-tax profit expectations for the 2022/23 financial year towards the upper end of its guidance range of £630m to £690m. 

It also moved back into the black with a statutory pre-tax profit of £854m in 2021/22, boosted by factors such as lower restructuring and impairment costs.

The grocer had swung to a statutory pre-tax loss of £164m in 2020/21, which reflected one-off costs and impairments linked to its shift in strategy announced in November 2020 in which it made food its focus.

 

As profits move in the right direction, Sainsbury’s earnings should be further bolstered by its efforts to improve the profitability of its online groceries business, as it seeks to reduce operational costs while improving customer experience.

Given its expanding ecosystem, supported by a robust multichannel model and strengthened by strategic partnerships, digital innovation and a staunch customer focus, Sainsbury’s is well positioned for growth, with Prospect expecting its group sales to reach the £38bn mark by 2026/27.