A resurgent Tesco, slowing food price inflation, lower growth: how worried should Sainsbury's chief executive Justin King be? Alex Black reports


The City has grown used to strong like-for-like figures from Sainsbury's since Justin King took over, and with a better-than-expected 18.5% increase in underlying profits, he didn't disappoint.

But a resurgent Tesco, slowing food price inflation, like-for-like sales growth of just 5.7% and 4.7% in the 12 weeks to 31 October the lowest of the big four, according to Nielsen has prompted analysts to speculate once again on Sainsbury's future, with rumours of another Qatari-based bid helping to fuel the fire in the media.

At the interims this week, the Sainsbury's CEO was once again upbeat, with an update on the group's expansion plans accompanying insights into a resurgence in sales of ready meals, flowers and non-food goods in the run-up to Christmas. But by his chirpy standards, it was an uncharacteristically gloomy forecast for 2010 that King painted, as he pointed out the challenge of facing up to VAT increases, the uncertainty of an election, rising taxes, growing unemployment and the possibility of a 'W'-shaped economic recovery.

On Sainsbury's performance, however, King was defiant. "We don't need anyone else to fail for us to succeed... we're still growing market share," he said.

Expansion plansHis confidence is no doubt borne of Sainsbury's expansion plans. Earlier this year the chain announced it would open 50 new supermarkets and 150 new c-stores by March 2011. It emerged, this week, that 80% of the its planned 15% space growth would come from Wales, Scotland and the north of England, creating about 8,000 jobs. This will halve to 20% the percentage of the UK population that currently lives more than 10 minutes drive from a Sainsbury's, while delivering gross space growth of up to 7% by March 2010 and double that by the following year.

In the short term King has also been encouraged by sales of higher-margin non-food lines, growing at about 2.5 times the rate of food, and the number of lines on the general merchandise website, launched in July, will ­increase from 4,500 to 8,000 by this Christmas.

King's longer-term aim is to build large non-food areas in new stores and expand the size of non-food areas in current stores, taking the number of 15,000 sq ft-plus stores with non-food lines from 38 to more than 100 by March 2011.

Analysts have expressed concern that these plans leave Sainsbury's more debt-laden than before, with the retailer's net debt at £1.8bn as of 3 October, an increase of £94m from the 2009 year-end position. However, CFO Darren Shapland pointed out that the net interest cost was down 25.4% to £44m year-on-year because about £850m of the company's debt repayment was inflation linked. These costs are expected to remain similar in the second half of the year.

But it's the short-term slowdown that's given most cause for concern. Shore Capital analyst Darren Shirley says Sainsbury's profit growth is mainly attributable to operational gearing, and other analysts have accused it of buying sales through promotions rather than "encouraging consumers to shop deeper like Morrisons". King rubbishes such suggestions, arguing tighter cost control and a stronger promotional mix were working.

Flexibility in ranges and storesOther analysts appear placated. At RBS Justin Scarborough says those who doubted Sainsbury's model failed to understand the flexibility in ranges and stores. "The plans for new space are interesting, not just up to 2011 but beyond," says Scarborough. "65% of Sainsbury's property is freehold and it has revalued its estate up by £1bn to £8.5bn. Significant freehold ownership will remain a structural and strategic ideal."

Cazenove analyst Mike Tattersall adds that Sainsbury's is in a similar position to Tesco 10 years ago. "It has a big property opportunity and stores with expansion potential. If it gets this right the returns should be good."

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