Strong sales figures and a bold store expansion plan have made Sainsbury’s the sector’s fall guy no more, says George MacDonald

The recession has meant growth is a distant memory for some retailers, but not for supermarket group Sainsbury’s.

The grocer has not just ridden out the downturn, it has piled on sales. And now it is poised to accelerate expansion using the proceeds of a surprise share placing and bond offer.

Last week’s disclosure of 7.8 per cent like-for-like growth in the first quarter – the 18th successive quarterly advance – coincided with a £445m fundraising to open more shops and extend existing stores, ramp up the non-food offer and push faster into the convenience market (see box below).

Sainsbury’s chief executive Justin King has surprised his critics with such a consistently strong performance – especially in the face of such tough recent trading conditions. Innovations such as “Feed your family for a fiver” have carried a compelling value message while not diminishing Sainsbury’s reputation for quality.

So, with cash in the bank and a strategy in place for the next phase of expansion, what is the significance for the food retail sector of a newly rampant Sainsbury’s?

For King, the success achieved during the five years of his leadership has re-established the enduring strengths of the Sainsbury’s brand and there are opportunistic reasons – such as a weak property market – to act quickly.

King says: “The fundraising will provide us with the financial flexibility to take advantage of current opportunities to grow our business further and faster. We can speed up our growth in areas of lower market share, maintain the strength of our balance sheet and invest in the long-term growth.”

There are many reasons why King’s confidence is understandable. Last week he said that transaction numbers are now over 18.5 million a week, investment in prices and product has increased the average basket size, and improved availability and service was ensuring the customer promise was being kept.

Observers agree with King’s reading of the opportunities. Bernstein food retail analyst Chris Hogbin says: “Now is a good time to be growing because it’s a cheap time to be growing.”

Allegra Strategies projects director Steve Gotham agrees. “There are a number of retailers out there that are doing OK. The property market is in a state of disarray and to an extent there is a race for space.”

And that race is one that Sainsbury’s has sometimes lagged behind in. The business lost direction under King’s two predecessors, Dino Adriano and Sir Peter Davis, necessitating a refocus.

But now Sainsbury’s is expanding again. The grocer intends to notch up space growth of 15 per cent by March 2011 compared with its previous target over that period of 10 per cent. Altogether, Sainsbury’s will add about 2.5 million sq ft of sales space over two years. Expansion began last week with the acquisition of another nine stores from Co-operative Group for £29m, on top of 24 acquired in March.

Gotham notes: “Go back a few years and Sainsbury’s was opening more space but it had to cut its cloth to suit the times. It fell back and it’s a case of returning to where it was – in a sense, it’s not breaking new boundaries at all.”

That view might be reinforced by a glance at Tesco’s growth. Tesco opened 2 million sq ft of selling space last year, much of which was extensions to Extra stores. The retailer also opened 21 superstores and 125 Express shops, bringing its store count to almost 2,300. This year, Tesco intends to add the equivalent of an additional 6.4 per cent of selling space. While Sainsbury’s might be outpacing Tesco proportionally, in absolute terms it is dwarfed.

But there are undoubtedly opportunities for Sainsbury’s. King said that “areas of weakness” – such as Wales, Scotland and the north of England – would be targeted for new shops, enabling Sainsbury’s to reach more shoppers than it does now. The grocer also said that it is benefiting from “more favourable conditions” for space growth due to reduced build and fit-out costs. And store extensions – shops already extended have delivered “better than expected returns”, the grocer said – will enable a bigger and better non-food offer.

As part of its expansion the grocer will carry out 35 large extensions – doubling the number of 60,000 sq ft stores to just over 50.

While Sainsbury’s deadly rivals Tesco and Asda powered into general merchandise sectors such as clothing from the 1990s onwards, it was left behind.

King prioritised Sainsbury’s food offer and that led the grocer’s recovery. However, initiatives such as the creation of clothing brand Tu are now bearing fruit. King reported that the first quarter was Tu’s best since launch in 2004 and there were 1 million transactions in one week. He said that home ranges also grew strongly.

Although there is opportunity for Sainsbury’s to close the non-food gap with competitors, Asda and Tesco continue to make strides. In its first-quarter update in May, Asda highlighted quality improvements made to its clothing offer. The George brand gained an additional 40 basis points of market share and the retailer said sales growth was attributable to sales of full-price merchandise.

And Tesco last week flagged a return to like-for-like growth in general merchandise categories such as homewares and electricals.

Gotham points out that Sainsbury’s options to add non-food space – about 40 per cent of the new total planned – are comparatively limited and that it is unlikely to be able to be as aggressive as some rivals on price.

But Hogbin argues the non-food market remains fragmented and a credible offer should work well for Sainsbury’s, assisted by the footfall driven by grocery. “What Sainsbury’s is doing now is what Tesco and Asda have done for a long time, but Justin King was absolutely right to focus on food first,” he says.

Now that general merchandise has risen up Sainsbury’s priority list Singer analyst Matthew McEachran maintains that the decision “could potentially weigh on Marks & Spencer as well as other relevant competitors in the food and non-food arena”.

Return to the top

Until 1995, Sainsbury’s was Britain’s biggest grocer. Tesco stole its crown that year and earlier this decade Asda toppled Sainsbury’s from the number two position.

Now Sainsbury’s sales growth is rocketing while Tesco’s is more muted – it posted a 4.3 per cent UK like-for-like uplift in its first quarter. While Sir Terry Leahy, the market leader’s chief executive, may be grinding his teeth in fury at Sainsbury’s resurgence he will not be worried about being usurped just yet. But ING analyst Peter Brockwell warns there is “a real risk” that Sainsbury’s plan “forces Tesco into an
aggressive response”.

Despite pressing the button on growth, it remains almost unimaginable that Sainsbury’s will be number one again. The market shares – 30.8 per cent and 16.3 per cent for Tesco and Sainsbury’s respectively – tell a compelling story.

Asda controls a 17.1 per cent share. Could Sainsbury’s yet overtake its Wal-Mart-owned rival? It is possible at some point, Hogbin concedes, but this was not the point of last week’s expansion announcement, which was about Sainsbury’s raising and deploying capital cheaply and profitably rather than specifically targeting Asda.

Gotham agrees and says: “I don’t think Sainsbury’s is obsessed with getting back to the number two spot. Both have to be concerned with being on their best form.”

One ongoing gripe expressed by the City about King’s leadership is that for all the improvements made, profitability has not motored sufficiently. “It’s a fact, margins haven’t gone up much,” says Hogbin. But he admits: “Us in the City are often impatient to see margin come through but the way to have a sustainable recovery is to put the customer first. From a business perspective King is probably doing the right thing, but there’s progress to be made.”

Pali International analyst Nick Bubb thinks Sainsbury’s latest initiative is likely to help. He says: “Sainsbury’s profitability remains well below that of Tesco and to close that gap more quickly it needs to grow its scale – without giving away gross margin – and leverage its cost base. One way to do that is to accelerate new space opening, to exploit the competitive edge the business has acquired in the past 12 to 18 months, to fully exploit the recent non-food range developments and take advantage of a more benign planning environment and soft property market.”

For some years, all the big grocers have been growing. Underperformance at Sainsbury’s has been addressed by King, and at Morrisons by Marc Bolland. At the same time, Asda and Tesco have both kept up momentum. The grocers have sometimes been assisted by inflation but the continued expansion of the big four in a maturing market is testament to their strengths. Gotham says: “There’s usually a fall guy. It just shows the dynamism of the sector.”

That is probably a good way to look at Sainsbury’s latest expansion programme. The drive might not make Sainsbury’s number one, but is illustrative of the fact that there is still cake on the table, and the difference that effective management can make when it comes to grabbing a slice.

How Sainsbury’s numbers add up


like-for-like growth in the first quarter


money raised via a share placing and bond offer


million transactions a week


million sq ft of sales space to be added over two years


market share – compared with Tesco’s 30.8 per cent

Sainsbury’s king of convenience?

A bigger presence in the convenience market forms part of Sainsbury’s accelerated space growth plans and the grocer intends to add 150 convenience stores over the next two financial years.

Sainsbury’s convenience director Dido Harding admits this is partly a result of the fact that it dropped the ball in the 1990s when the opportunity to take more stores and keep up with Tesco’s growth was there. Now Tesco’s share of the convenience market is five times that of Sainsbury’s – 10 per cent compared with just 2 per cent.

“We were slow to grasp opportunities in comparison to Tesco,” says Harding, who in fact joined the Holborn crew from Cheshunt. “But it’s still not a consolidated market. A lot of the growth opportunities for Sainsbury’s are there because we didn’t take advantage in the 1990s.”

Opening 50 convenience stores this financial year and 100 next will be no mean feat. Now that so many convenience chains have been bought up, it usually means adopting a location by location approach and negotiations with a disparate group of landlords. Harding admits: “The vast majority of the growth will be one store at a time.”

But she is confident that, despite Tesco’s early push into convenience, Sainsbury’s has plenty of opportunity. “There’s space for both of us in the country,” she adds. “Tesco is still a relatively small player in the market. I don’t spend lots of time being beaten up by big bad Tesco.”

Provided Sainsbury’s keeps its foot on the gas this time, rather than adopting the stop-start approach of the past, Harding’s confidence that Sainsbury’s can deliver should be justified.

Ben Cooper

The issue of fundraising

Sainsbury’s decision to fund accelerated expansion via a share placing and a bond offer rather than debt did not go down well with some investors, who were annoyed by the resulting earnings and equity dilution.

Sainsbury’s finance director Darren Shapland said the method used would provide a long-term solution, maintaining balance sheet strength and enabling the retention of a BBB- credit rating.

However, ING analyst Peter Brockwell cut his target price and downgraded the grocer from buy to hold. “We would have preferred if management could have sold off some mature property assets to pay for this expansion drive,” he said.

Charles Stanley analyst Sam Hart said the fundraising and expansion would be “mildly earnings dilutive” but thought that it was a “sensible strategic move”.