Supermarkets are having a very difficult time of late, with the Big Four facing increasing levels of competition from discount rivals such as Aldi and Lidl. As a result of falling sales and plummeting market share, therefore, Sainsbury’s has this week indicated that it will be scrapping its large scale store openings programme, along with cutting dividends and implementing cost savings measures in order to keep its financial situation under control.
As sales in out of town hypermarkets continue to fall, analysts expect new chief executive Mike Coupe to announce a sharp halt in openings of this type when he unveils Sainsbury’s interim results later this week. Instead, it is believed that he will focus upon expanding the group’s online operations and invest further in its clothing business as well as expanding the convenience network Sainsbury’s currently operates in the UK.
The forecast abrupt turnabout in Sainsbury’s business plan is the result of a strategic review which Mr Coupe announced would be undertaken last month, largely due to the struggles faced by the group’s larger stores. Analysts believe that findings from this review will highlight a need for Sainsbury’s to cut capital expenditure, perhaps by as much as several million.
Shore Capital analyst Clive Black expects capital expenditure to fall from just under £900 million in the current financial year to between £550 million and £600 million in the near future.
He says; “We expect Sainsbury’s to join Asda and Morrisons in becoming more in touch with its customers through a re-allocation of resources from a lower cost base with constrained capital outflows and potentially lower dividend flows.
“For now, as is the case at Tesco, we suspect customers must take precedent over shareholders and other stakeholders in the food system.”
Although the decision to mothball sites earmarked for new large supermarkets will not have been taken lightly by management, Exane BNP Paribas analyst John Kershaw believes that Sainsbury’s may be forced to write down the value of land on its balance sheet. Should his predictions that new store space will be cut by around a third come true, which would see less than 500,000 square feet of new selling space opened next year compared to the 750,000-plus square feet this year, Sainsbury’s could stand to encounter a high loss on previous land investments.
In terms of Sainsbury’s interim results, analysts predict that Mr Coupe will reveal a 12.5 per cent plunge in underlying pre-tax profits which, year on year, would result in a total of £350 million. While this would, by no means, be the poorest result released in the grocery market of late, it would be a disappointment for a brand which until recently enjoyed a decade long streak of persistent profit and sales growth.
Sainsbury’s predicted decision to put the reins on new openings may finally be an indicator that the Big Four are beginning to listen to consumers, who have largely changed shopping habits to conform to a more convenience orientated outlook. However, with Aldi and Lidl breathing down the brand’s neck, the question is whether this will be too little, too late for Sainsbury’s customers.
Do you think Sainsbury’s will manage to grow sales if new store openings drop?
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