Sainsbury's warns of £500m COVID-19 cost impact as it releases FY 2019 results

Nick Gladding
Senior Retail Analyst
@RetailAnalysis

Date : 30 April 2020

Sainsbury's has announced that profits could be hit by £500m in the year ahead as it takes on costs from the COVID-19 crisis. However the group's ability to weather the storm is strengthened by encouraging full year results for 2019, including seen steady improvements in grocery sales since last year's strategy update.
 

COVID-19 impact update

  • Sainsbury's base case modelling assumes lockdown restrictions continue until the end of June and that the business will continue to be disrupted until mid-September
  • The direct costs associated with COVID-19 (safety procedures, staffing and changes to store operations) together with the impact of lower sales of non-food, fuel and financial services are put at over £500m but are expected to be broadly offset by stronger grocery sales and £450m business rates relief
  • Sainsbury's has opted not to take up use the government's furlough scheme or delay making VAT payments
  • Sainsbury's modelling assumes high single digit grocery sales growth through the lockdown period
  • Retail sales growth for the last seven weeks has been +8% (Grocery +12%, General Merchandise +3%, Clothing -53%)
  • For the remainder of H1 2020 it anticipates low single digit grocery growth, boosted by the higher number of meals eaten at home. Normal grocery market conditions are assumed to resume from September

FY 2019 results in brief - year to 7 March 2020

  • LFL sales (ex fuel) -0.6% (H1: -1.0%, Q3: -0.7%, Q4: +1.3%)
  • Retail sales (ex fuel) -0.4% (Grocery +0.4%, General Merchandise -2.9%, Clothing +1.2%)
  • Online +7.6%, Convenience +1.3%, Supermarkets -0.1%
  • Underlying profit before tax -2% to £586m, up 8% in H2, following a 15% decline in H1 due to phasing of cost savings, higher marketing costs and tough weather comparatives
  • Net debt reduced by £343m to £1.2bn

Strategy highlights

Price competitiveness:  Sainsbury's has improved its pricing vs its main supermarket peers, through tactical investments in price and the expansion of its entry price point product own brand range to 200 lines. Short term price reductions have been replaced by regular Price Lockdown events that last at least eight weeks. To date, 2,300 products have had prices held or reduced boosting shopper confidence in Sainsbury's value positioning. Sainsbury's was also named as the UK's cheapest supermarket for branded groceries by consumer magazine Which?

Distinctive products and new categories: The £1bn Taste the Difference range has been re-launched with 700 new, reformulated or repackaged products, causing volumes to rise by 0.3%. The choice of distinctive products has been broadened through the expansion of the Plant Pioneers range, the Future Brand programme (which achieved sales of £146m) and a three year exclusive partnership with Leon to sell its fast and healthy food-to-go in 600 stores. Beauty and wellness has been another priority with 134 Beauty Halls and 48 Wellness hubs now installed at stores.

Fast, friendly and convenient: Customer service scores have been boosted by investments to improve service and speed up payment. Following the rollout of SmartShop technology to all supermarkets, the system is now being used for up to 20% of sales in some stores. In the convenience channel, Sainsbury's has begun introducing 'On the go' city stores - such as Mansion House - and neighbourhood hub stores to better meet local shoppers' needs Sainsbury's has also broadened the reach of its concession partners. Sushi Gourmet counters, for instance, are now available in 123 stores.

Digital:  The new Nectar app has been downloaded by 4.5 million of the loyalty scheme's 18 million members, allowing them to access personalised rewards that are helping to incentivise loyalty to Sainsbury's. Nectar has also been fully extended to Argos customers

Efficiency: Sainsbury's is making good progress to cuts its structural costs by £500m over five years, by bringing Sainsbury's and Argos together. A head office restructure has reduced management roles and more support functions are being shared. An 'Internet of Things' platform is being developed to automate and connect more store processes and range of app developments for colleagues is helping to drive in-store efficiency and availability.

Sustainability: Sainsbury's has committed to invest over £1bn over 20 years to become Net Zero across all its operations by 2040. Key initiatives include boosting its use of renewable energy, minimising water use and plastic packaging.

 

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