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I have chosen the topic “The business and financial performance of an organisation over a three year period “. In this research and analysis report I will do the financial and business analysis of J Sainsbury Plc. I will compare key ratios, figures and statistics of J Sainsbury Plc with Tesco Plc. This analysis will be for last three years i.e. from 2006 to 2008.
REASONS FOR CHOOSING THE TOPIC
The UK food retail industry is dominated by BIG 4 retailers including Tesco, Asda, Sainsbury and Morrison. These retailers are the part of our daily life, in fact because of their immense size, they shape our surroundings. Among these BIG 4 Sainsbury is particularly interesting because it had difficult ride over the last few years.
Sainsbury lost its market leader position to Tesco in 1995 and then lost its second position to Asda in 2003. Its most recent market share in UK markets is (as of March 2008) at 14.8%, securing third position out of the "Big Four" supermarkets, behind Tesco (31.5%), ASDA (16.8%) but ahead of Morrison (11.4%).(Source: TNS)
Furthermore, Competition Commission disqualified Sainsbury from the race to bid for Safeway (news.bbc.co.uk)
Strategy is one of the most important components for winning market share which was neglected by Sainsbury. Strategy formulation and implementation remains problem for Sainsbury as they were quite unclear in their strategic decisions as whether to concentrate on quality products like Waitrose and M&S or be volume retailer competing on price like Tesco and Asda. Moreover poor supply chain, poor availability, shocking standards and confusing marketing messages contributed towards Sainsbury's falling sales and profitability.
In 2004 it bought back its IT from Accenture. This was a year of poor corporate governance for Sainsbury when it's CEO promoted himself to the chairman and took away large bonuses at a time when it had a hole in its pension fund of almost £600m, and it faced the possibility of its credit rating being cut to junk status.
On top of this, it was rapidly approaching the point where it would have to refinance about £800m of its £1.7bn worth of unsecured bonds. This refinancing was a material risk to its ongoing survival. (Paul J Davis: Financial Times)
Sainsbury sold its Shaw's Supermarket unit to Albertson's and exited the US market and was left with no international markets as it had already exited from Egypt in 2002.
In October 2004 the new board led by Justin King (CEO) and Philip Hampton (chairman) came up with the recovery strategy “Making Sainsbury Great Again”. The objectives set in this strategy were the following.
- To grow sales (including VAT excluding fuel) by £2.5 bn, with grocery contributing sales of £1.4 bn, non-food products sales of £700m and convenience stores sales of £400 by March 2008.
- To invest at least £400m in improving product quality and price position relative to competitors and to find annual buying synergies of 100-150 basis points to be reinvested in the customer office.
- To deliver operating costs efficiencies of at least £400m.
(Sainsbury's Annual Report 2007: Business Overview)
Sainsbury's is currently operating 823 convenience stores, supermarkets and hypermarkets.
It is the third largest supermarket chain in the UK, and right now it is emphasizing on delivering high quality products to its customer as like its rivals.
According to CACI, as of 2006, Sainsbury's has market dominance in 8 postcode areas; TQ (Torquay), SN (Swindon), GU (Guildford), RH (Redhill), DA (Dartford), SE (South East London), EN (Enfield) and WV (Wolverhampton). It is particularly strong in London and the South-East, where it is based, and although it has a national store portfolio, it is biased towards the South-East.
J Sainsbury Plc includes 504 supermarkets. A large Sainsbury supermarket offers around 30,000 products; approximately 50% of these products are of Sainsbury's own brand. In addition to food and grocery products an increasing number of stores also offer complementary non food products and services.
SAINSBURY CONVENIECE SOTRES:
Sainsbury convenience stores consists of chain of 54 Bell stores in North East England, 114 Jacsons stores in Yorkshire and North Midland, 6 JB Beaumont stores located in East Midland and Sainsbury local stores. These stores are the major part of Sainsbury's recovery plan “MSGA”. Twenty-four of these stores were operating at Shell's petrol stations but now only three of these are operating under Sainsbury, rest are sold back to Shell Petroleum as the return on investment was unsatisfactory for both companies.
Sainsbury Bank is a 50:50 joint venture between J Sainsbury Plc and HBOS, stared in February 2007. It offers financial services which includes saving accounts, loans, credit cards, car insurance, home insurance, travel insurance, life insurance , pet insurance and a new service called “Internet saving products” has also launched. Sainsbury Bank was fully consolidated in J Sainsbury Plc group financial statements before the joint venture deal with took place HBOS.
Sainsbury online is an internet based home delivery shopping service. This service is currently operating in 147 stores. It includes delivering food and grocery, CDs, DVDs, books, flowers, wine, gifts and electronic equipments.
This service covers around UK's 85% post codes.
The online deliverers also collect Sainsbury's unwanted plastic bags from customers for recycling.
AIMS AND OBJECTIVES:
This report consist of Financial and business analysis of Sainsbury Plc which provide useful information to current as well as potential shareholders and also to other stakeholders.
Financial analysis of J Sainsbury Plc performance and position will typically involves an analysis of Group's Annual Reports and Financial statements of last three years i.e. 2006, 2007 and 2008. I have also gone back five years to highlight major ups and downs in company's financial performance.
My report will include:
- Ratio analysis,
- Sales growth trends analysis,
- Comparison of cost trends.
- Other key figures comparison, mentioned later in this report.
I chose the Tesco to compare with Sainsbury because it is market leader and its key ratios, figures and statistics can be used as benchmark for evaluating Sainsbury's financial performance. This will also require the analysis of Tesco's financial statements of last three years.
NON FINANCIAL ANALYSIS:
In non financial analysis I will carry out detailed SWOT analysis to review Sainsbury's standing in present food retail sector and its future prospects. This analysis includes highlighting strengths and weaknesses company currently have plus the opportunities and threats futures presents.
1) J Sainsbury Plc Annual Reports and Financial Statements:
Annual reports were one of the major sources of information collected. They provided detailed annual results, company's objectives and information about Sainsbury's recovery plan (MSGA) which helped in calculating key ratios and analysing non financial data which was vital to this research and analysis report.
2) Tesco Plc Annual Reports and Financial Statements:
These annual reports and financial statements helped in calculating Tesco's key ratios which were used for the comparison with Sainsbury ratios for the purpose of analysis. They are also one of the sources of non financial data of Tesco used in this report.
3) Interim Reports:
Some of the interim reports are also used in this dissertation for information collection purposes. Although unaudited, these reports provide up to date data to analyse trends and seasonality in business. These reports contribute as a large part in this dissertation.
4) Analyst Reports:
Analysis reports were also used as the source of information. They provided the actual insight to the decisions made by the Sainsbury's board and also helped in interpreting financial data more accurately. These reports provided their independent and unbiased views on company.
Some of the articles were also used in this report. These are the great source of up to date business news, especially “The Financial Times”, “The Independent”and “The Guardian”. Information from these sources contributed a lot in this dissertation. Up to data information is taken from Newspapers and analysis was made. Articles such as “Sainsbury to push own-brand goods”, “Upbeat Sainsbury's to focus on non-food“, “All-Party Parliamentary Group for Small Shops“andsome other articles taken from newspapers were very helpful.
Some of latest information was taken from the magazines like “Business week”, “PQ Magazine” and “The Economist”, that information was extremely helpful in analysing economic environment at this point of time.
7) Kaplan Financial Study Notes and Textbook:
One of the most important sources of information was Kaplan Financial study notes and Textbook of paper “Financial Reporting” (F7) complemented my existing knowledge of calculating ratios and analysing financial and non financial data of business. These sources were extremely helpful for formation of my dissertation.
1) Internet Research:
Basically research was done through online access to annual reports and financial statements of Sainsbury and Tesco from their website made my work much easier. Also other website like ft.com, bbc.co.uk, guardian.co.uk, foodanddrinkeurope.com, uk.finance.yahoo.com and investopedia.com provided abundant and crucial information for the purpose of this analysis. Plenty of research was done through internet and lot of information was gathered. Basically, internet research has been the major source of research for my report.
2) Library Research:
Most of the research was done through British Library and City Centre. My visits to these libraries involved reading publications relating to business analyst reports, magazines and newspapers. I also went through CD ROMs such as “Financial Analysis Made Easy” (FAME) and “Retail Analysis (IGD-Institute of Grocery Distribution)”.
3) In Store Visit:
I visited Sainsbury supermarket in Tooting and met the assistant manager and supervisor, we chatted about some issues concerning Sainsbury. This helped me incorporating some day to day practical life issues in my report. The information collected was very useful in formulation of my analysis report.
SALES AND PROFIT GROWTH:
Sainsbury group sales grew over last 3 years. In the fiscal year 2008 sales revenue increased by 4% to £17837 million (Yr. 2007 sales revenue £17151 m) which makes the total sales of £2.7 billion , this exceeds the original target of £2.5 billion mentioned in the Sainsbury recovery plan “MSGA”.
(Graph Source: Sainsbury Financial Statements)
Sales are mainly grown because Sainsbury invested heavily in price cuts. By the end of March 2008 prices of 1800 products were reduced despite of overall inflation in grocery market. This was achieved because in last three years Sainsbury invested £450 million in prices cuts and improving services.
Company also increased prices on its premium range products to keep the grocery prices low.
The effects of this heavy investment of £450 million and some changes made in company's strategy to implement recovery plan can be seen in Sainsbury's performance over last 3 years such as:
- By the end of financial year 2008, company reported 13 consecutive quarters of sales growth. (Sainsbury Annual report 2oo8)
- As mentioned above company achieved £2.7 billion additional sales by March 08 against the original stretching target of £2.5 billion. (Sainsbury Annual report 2oo8)
- Sainsbury's sales growth is also reflected by substantially improved profits. In year 2008 the underlying profits for the year were increased by 28.4% to £488 million, more than double as compare to the profits reported in March 2005, prior to recovery plan.
- Predefined cost saving target of £440 million for financial year end 2008 was also achieved by the company.
- The number of customers served by Sainsbury each week increased by 2.5 million to 16.5 million during year 2008 (Year 2007 14 million customer/week).
Company expanded its business during the last three years. In year 2008 Sainsbury opened 14 new supermarkets, 15 stores were further extended and 52 stores were refurbished. During the year the gross selling area of 576,000 sq ft was created, among which 472,000 sq ft were supermarkets and 104,000 sq ft were convenience stores. 39,000 sq ft was closed during the year. This growth exceeded the original growth target by 3.1%. The implied impact of new space was in line with sales growth.
Sainsbury opened more new smaller size stores in last 3 years. This made Sainsbury to enter in neighbourhood of households and provide better online delivery services.
Company's online services are showing constant growth as company shows 40% increase in online sales by the end of year 2007 and again 43% sales growth in year 2008. A significant increase in deliveries was reported during the year, 90,000 deliveries were made each week during the year 2008 while in 2007 60,000 deliveries per week were made.
There is a decline in growth percentage trend from last 2007 sales growth percentage of 6.8 % to 4 % this year. One of the major reasons is the credit crunch and overall economy recession in UK.
Tesco had grown its sales by 8 % to £42,641 million during the year 2007, considering Tesco's overseas operations, it can be said that Sainsbury was giving a hard time to Tesco in UK in the year 2007.
By the end of year 2008, Tesco's sales grew by 10.4 % to £47,298 while Sainsbury's sales grew by 4 %, much less growth as compare to Tesco. This reflects the effect of credit crunch and UK's economy recession. Tesco shielded itself up to some extent by this economy crisis by its involvement in overseas operations while Sainsbury was more exposed to this crisis as its only operations are in UK.
(Graph Source: Sainsbury & Tesco Financial Statements)
GROSS PROFIT MARGIN:
Sainsbury's gross profit was increased from 6.64 % in year 2006 to 6.83 % in the year 2007 but in 2008 it decreased by 1.21 % to 5.62 %. Although the sales revenue was increased by 4% from last year but this decline in gross profit margin could be because Sainsbury has heavily invested in price cuts as 1800 product prices were reduced as compared to the last year when 1000 product prices were reduced.
During the year as inflation was increased to 1.9% (year 2007 inflation 1%). So profit was sacrificed to cut prices to maintain competitiveness in market.
Sainsbury premium ranges such as “Taste the Difference” are performing well and helping in maintaining high margins on products demanded by quality conscious customers but their sales during the year was not enough to maintain the growth trend in gross profit margin.
It can be seen that the CEO of Sainsbury Mr. Justin King implemented business strategy successfully which implied that price cuts will attract more cuts to Sainsbury. In 2005 he was criticised by an analyst at Panmure Gordon that sales were not transmitted to profits and that margins were falling (www.finance.yahoo.com). He was proven wrong when margins rose last year. This year the profits margins were affected by many other factors such as the burden of environmental and ethical responsibilities undertaken by company, credit crunch, economy recession etc.(Graph Source: Sainsbury & Tesco Financial Statements)
Tesco's gross profit margin increased from 7.61% in 2006 to 8.12% in 2007. In 2008 it again decreased to 7.68%. This trend of rise and fall of gross profit margin is the same as Sainsbury's and over all food retail industry. Tesco gross profit margins are greater than Sainsbury as it is a well stable company.
OPERATING PROFIT MARGIN:
Operating profit Margins (Appendix)
Company's profit was massively increased in 2007 by 127% to £520 million from £229 million from 2006.
Operating profit margin in 2007 increased 1.6% to 3.03% (Yr, 2006 operating profit margin 1.43%).
In year 2006 operating profit figure included business review cost of £51 million and IT sourcing cost of £63 million. These were the major costs which contributed towards lower profit margins in 2006.
Moreover in March 2007 operating profit was higher due to the profits made on part disposal of Sainsbury bank.
In year 2008 Sainsbury operating profit margin decreased to 2.97%.
The reasons for reduced operating profit margin in year 2008 might be the cost figures included in operating expanses such as the cost relating to approach from “Delta Two” (Qatari investors), which is £7 million and cost associated with office of fair trading dairy inquiry which is £27 million.
Tesco's operating profit margins shows steady growth during last 3 years. It was increased by 0.43% to 6.21% in 2007(year 2006 operating profit margin 5.78%). It decreased by 0.31% to 5.9% in 2008. This means Tesco has good control over its operating expenses. That trend of first increase of operating profit in 2007 and then decrease in 2008 is shown by whole food retail industry during last three years.
NET PROFIT MARGIN:
Sainsbury's net profit has increasing trend of over past three years. In year 2007 net profit was more than 50 times of net profit of year 2006 which was £58 million. During the year 2008 net profit further increased by 1.5% to £329 million.
Group's net profit margin in 2007 was 1.89% which was 1.53% higher than 2006 net profit margin (Y/E 2006 net profit margin 0.36%). This was mainly due to the disposal of Sainsbury bank at profit of £10 million. Other significant figures contributed to the net profit margin were past services gains on defined benefit schemes. According to new rule Sainsbury redefined benefit schemes. In line with this new definition £52 million was recognized in income statement of 2007.
Finance cost was reduced by £155 million to £107 million, this also contributed to the higher net profit margins of 2007. The reason behind this was Sainsbury incurred some financing fair value losses on financial and retailing, these were included in finance cost of year 2006
During the year 2008, net profit margins rise slightly higher than 2007 to 1.9%. Despite of declining gross profit margins, operating profit margins and loss made on joint venture of Sainsbury Bank of £2 million, net profit margins increased. The main reasons contributing to fore mentioned increase were the amounts of one of items such as fair value gains of other financial assets of £22 million included in net profit and the income tax expense which was lower because of some over provision made in previous years.
(Graph Source: Sainsbury & Tesco Financial Statements)
Tesco's net profit margin has also an increasing trend during past three years. Its net profit rose slightly in 2008 to 4.5% from the net profit margins of 2007 which were 4.45%. These are way too higher than Sainsbury's net profit margins. These could be set as benchmark targets in next couple of years.
COST OF SALES:
% Increase in Cost of Sales (Appendix)
During the year 2007 Sainsbury's cost of sales increased by 6.57%. This was the big increase as compare to previous years percentage increase but was expected by Sainsbury's recovery plan. Company invested £400 million in price cuts from October 2004 to March 2007.
In year 2008 cost of sales increased by 5.36%, again that was expected as company further invested £50 million during the year. This increase in cost is not considered too high as company achieved its cost saving targets of £440 million this year.
Sainsbury's administrative expenses in year 2007 were decreased by 20.26% to £669 million (Year 2006 admin expenses £839million), which further decreased by 25% to £502 million by March 2008.
This constant reduction in administrative expenses is brilliant as it is against the continuous trend of sales growth in last three years.
This can be explained as a result of heavy investment of £63 million in IT in-sourcing in 2006, which is now paid off and saved cost.
Other cost savings over the years included labour cost and supply chain cost.
CURRENT AND QUICK RATIO:
Sainsbury's current ratio for the year end March 2006 was 0.8 times which according industry norms were considered healthy. It was weakened by the year end 2007 to 0.71 times and then further declined to 0.66 times by March 2008.
This Declining trend could be explained as Sainsbury bank in 2007 was in consolidated in group financial statements, the amount due from Bank's customers of £1,888 million was excluded from groups current assets. Furthermore decline in 2008 might be because there was a decrease of £409 million in cash and cash equivalents during the year.
(Graph Source: Sainsbury & Tesco Financial Statements)
Sainsbury is better than Tesco in terms of current ratio, but Tesco's current ratio rose steadily over past three years and Tesco is catching up with Sainsbury (as shown in graph above).
Sainsbury's quick ratio (acid-test ratio) in y/e 2007 was increased to 0.5 times from 0.4 times in 2006. This ratio further strengthens in 2008 to 0.68 times. The reason behind this is that Sainsbury has reduced is short term borrowings.
(Graph Source: Sainsbury & Tesco Financial Statements)
Tesco's quick ratio for y/e 2006, 2007 and 2008 are 0.33 times, 0.32 times and 0.38 times respectively. Sainsbury have stronger position than Tesco in terms of quick ratios.
Sainsbury's net cash and cash equivalent were decreased by £77 million to £765 million (y/e 2006 cash and cash equivalent £842 million). This can be explained by an increase in bank overdraft of £117 million and decrease in cash of £100 million.
There was also disposal of £33 million of cash on part disposal of Sainsbury Bank.
In Year end March 2008, cash and cash equivalent were decreased by net of £164 million to £601 million. This decrease is due to heavy investment for the purpose of business expansion.
There was also £31 million investment in joint investment during the year.
LONG TERM DEBT/EQUITY RATIO:
In 2006 Sainsbury's gearing ratio was alarmingly high at 100.2%.
During the year 2007 it was decreased to 57.6%. Major changes included the exclusion of amount due to Sainsbury's Bank customers to group balance sheet after the part disposal of the Bank. Group also made the second payment of £240 million in May 2006 as a part of the one of payment to defined benefit schemes.
High gearing in Y/E March 2006 could affect Sainsbury's credit ratings adversely as company had to refinance about £800 million of its £1.76 billion worth of unsecured bonds.
Company's deal with CMBS assisted in paying off its unsecured debts, it also filled half of the Sainsbury's pension funds deficits and saved £12 million a year in interest payments (Paul J Davis, Financial Times, July 25, 2007).
There was also an increase in reserves of £127 million due to actuarial gain on defined benefits schemes (notes to financial statement 2007, note 24).
In Y/E 2008, gearing ratio further improved to 52.2%. The significant figure for this improvement is a massive actuarial gain on benefit scheme of £390 million during the year. During the year Sainsbury has also reduced its short term borrowing levels.
(Graph Source: Sainsbury & Tesco Financial Statements)
Tesco's gearing ratio for Y/E 2007 was 57.5% almost same as Sainsbury's gearing ratio for the same year. In year 2008 Tesco's gearing ratio increased to 67.2% which is 15% higher than Sainsbury's gearing ratio for the year.
Sainsbury is better in terms of gearing ratio than Tesco.
Sainsbury's interest cover ratio improved from 1.67 times in 2006 to 5.46 times in 2007. That was mainly due to decrease in finance cost by £48 million (reasons for this decrease are discussed in earlier net profit margin section) and increase in profit during the year. This increased the confidence of investor in company.
In year 2008 interest cover ratio decrease to 4.56 times, this is because finance cost was increased by £25 million to £132 million during the year, which included high interest on loans taken by the group.
Tesco's has high interest cover ratio of 13% in a year 2008, which means it can pay its interest 13 times out of profits.
Earnings per Share (EPS):
Sainsbury's basic earnings per share of 2007 was 19.2 per share, were 5 times greater than basic EPS of 2006 (Yr. 2006 EPS 3.8 pence per share), Sainsbury's basic earnings per share in 2008 are almost same as it was in 2007, which is 19.1 pence per share. That rise in basic earnings per share was due to increase in net profit (profit attributable to equity holders of parent) during the year, resulted by general rise in activity and profit which is discussed in detail earlier in this report.
Sainsbury diluted earnings per share was up as well to 18.6 pence per share in 2008 and 18.9 pence per share in 2007 as compared to EPS of 3.8 pence per share in 2006.
Tesco's EPS are much higher than Sainsbury as shown in graph below.
(Graph Source: Sainsbury & Tesco Financial Statements)
WORKING CAPITAL RATIOS:
CURRENT ASSETS TURNOVER:
In year end March 2006, the current asset turnover was 4.2 times which was massively increased to 8.8 times in 2007, more than double as efficient use of asset was major highlighted issue in recovery plan.
It was further improved to 10.4 times in year 2008. Sainsbury increased the stock level during past three years but this ratio shows that it was used efficiently.
Tesco's current asset turnover has been on declining trend in last three years. But still it is better than Sainsbury's current asset turnover.
CREDITOR PAYMENT PERIOD:
Sainsbury's credit payment days of in 2006 were 51 days. In year end 2007 its payable days were 52 days, almost same as previous year.
In 2008 payable days decreased to 49 days, not a big difference but Sainsbury is trying to build good relation with creditors especially the local suppliers and getting bulk discounts by early payments to achieve its cost saving targets.
Tesco's payable period is increased from 51 days to 61 days in past three years.
STOCK HOLDING DAYS:
Sainsbury's stock holding period remain almost same during last 3 years. It was 14 days during 2006 and 2007, it was slightly increased to 15 days in 2008. As mentioned above Sainsbury has increased its inventory levels in line with sales growth to avoid stock outs and to get bulk discounts to achieve cost saving targets defined in recovery plan, this might be the reason for slight increase in stock holding days in 2008.
Tesco's stock holding period for the year increased during last three years .they are mentioned in table above.
As both companies are food retailers, there stock holding period is less because food expires in less time.
RECEIVABLE COLLECTION PERIOD:
Sainsbury debt collection period during Y/E march 2006 was 6 days which was reduce to 4 days by the end of company's financial year 2007 to accelerate the recovery of cash tied in debtors to finance its operations from its own money rather than short term borrowings so that finance cost could be reduced.
It remained same by the end of year 2008. Sainsbury receivables collection period is not too high because in retail business most of the sales are done on cash basis.
NON FINANCIAL ANALYSIS
1. STRONG BRAND EQUITY
Sainsbury is the longest standing major food retailer in UK. Its first store was opened in 1869 which means this brand has history of 139 years of serving its customers in the UK. During this period Sainsbury has built strong customer loyalty. It is one of the most trusted names in the grocery market and stabilizing its position day by day.
In October 2007 Sainsbury's was voted ‘Supermarket of the Year' at the Retail Industry Awards for the second year running. Sainsbury's won praise for connecting with its customers and being the “most contemporary retail brand” at “the leading edge of food”. (Article: Supermarket sweep for Sainsbury's at Retail Industry Awards, www.talkingretail.com)
2. OWN BRANDED PRODUCTS
Over the years Sainsbury has developed its own branded product ranges such as ‘Taste the Difference', ‘SO' (Sainsbury organic), ‘Sainsbury Basic' and ‘TU' (Sainsbury Clothing Brand). Around 50% of total products offered in Sainsbury stores are of its own brand. Sainsbury is one the best retail store who branded and owns its most of the products.
“J Sainsbury is stepping up its effort to persuade shoppers to switch to its own-brand products as the battle for depleted consumer spending intensifies. Justin King, chief executive, said the price “gap between brand and own label is as wide as it's ever been”. He added: “We're going to give those [large brands] more of a fight.”(Article: Sainsbury to push own-brand goods, By Tom Braithwaite, www.ft.com)
3. BROAD RANGE OF PRODUCTS AND SERVICES
A large Sainsbury supermarket offers around 30,000 products. An increasing number of stores also offer non food products and services such as CD's, DVD's, books, flowers, household items and electrical equipments. (Source: Sainsbury Financial Statements). Sainsbury is trying to increasing its products day by day and they are quite successful in implementing their this strategy.
“The next push is in non-food, which accounts for barely 10 per cent of turnover and has scope to do more, said Mr. Justin King (CEO of Sainsbury).
Sainsbury's has aligned its general merchandise offer with its food lines, through a “good, better, best” range. At the top end, customers can buy “Different by Design” tableware, while at the cheaper end, they can pick up polka dot mugs for £1.29.
It will launch a non-food website next spring” (Article:Upbeat Sainsbury's tofocus on non-food, By Lucy Killgren, www.ft.com).
Sainsbury bank also offers wide range of services like saving accounts, credit cards travel insurance, home insurance, pet insurance, life insurance and loans.
This wide range of products and services gives choice to the customers among substitutes and availability of almost all the everyday life necessities on one platform.
4. ECONIMIES OF SALES
Sainsbury is successfully implementing its market strategy and it enjoys economies of scale because it is a huge and diversified business in terms of its operations. It buys in bulks as a result it can lower the prices without affecting its profit margins. This would give competitive advantage to Sainsbury on its smaller rival stores .it also serves as a barrier to entry into current food retail market. Over the time they have developed their market position and competing without compromising its profit.
5. IMPROVING FINANCIAL PERFORMANCE
Sainsbury has improved its financial performance over the last three years. This is discussed in detail in earlier part of this report. They are trying to improve their financial position day by day and giving its competitor a tough time.
1. GEOGRAPHICAL RESTRICTIONS:
Sainsbury only operates in UK while its competitors like Tesco and Asda operates internationally. The food and grocery market in UK is already saturated and there are limited prospects of growth for Sainsbury.
2. HIGH GEARING:
Sainsbury is a highly geared company, so investors demand high levels of return to compensate them for high levels of risk they are exposed to. Moreover high gearing can be a problem in case company needs external funding.
3. INCREASED RANGE OF PRODUCTS AND SERVICES:
Sainsbury is continuously increasing the range of products and services it offers in its stores and online, this is making business transactions more complex and hard to manage.(Source: In store visit tooting branch, meeting with Supervisor: Mr. Moosa Kazim )
4. LOW RETURN PRODUCTS:
Sometimes Sainsbury has to just breakeven on some products just to survive in price war among its competitors.
1. EXPANDING BUSINESS:
Sainsbury is continuously expanding its business, now Sainsbury has 504 supermarkets and 319 convenes stores as compare to last year when it had 490 supermarkets and 298 convenience stores (Source: Sainsbury financial statements). This presents an opportunity for Sainsbury to serve more customers and ultimately increase its sales revenue and capture more market share. Sainsbury is also expanding its operations in different part of England.
2. OVERSEAS MARKET
Sainsbury has successfully executed it necessary plan and now it is operating in UK successfully, but Sainsbury had not yet entered in International market. It has an opportunity to invest in overseas market and open its stores in America, China and Japan etc. This is possible now than ever because investors might be interested in Sainsbury because of its improved performance in last couple of years.
3. SAINSBURY ONLINE SERVICES:
One of the most important and appealing service of Sainsbury is its online service and its sales grew 43% as compared to last year and there is still room for growth as new non food product offers are announced to be launched in first quarter of 2010 (Sainsbury Financial Statements).
This Service is currently operating in 147 sores and Sainsbury as plan to expand it.
4. ORGANIC FOOD:
Organic food has become essential in daily life and according to an estimate, in 2005 UK's organic food and beverages market was approx 1.2 billion and it will grow to 15% during 2005-2010. (www.foodanddrinkeurope.com)
So Sainsbury has an opportunity to increase its sales under the brand of SO (Sainsbury Organic).
1. HIGH COMPETETION
There is a high competition between Sainsbury and big retailers like Tesco, Asda, and Morrison and also from small convenience stores. Competitor pressure is further increased by companies like M&S and Waitrose in UK who are also expanding in UK as well as in emerging economies like India and china.
Sainsbury has also less number of stores than Tesco and unlike Tesco it only operates in UK. This surely has an impact on its profit margins and market share.
2. CREDIT CRUNCH & ECONOMY RECESSION
Now a day's world economy is facing worst condition and buyer's conditions is badly affected by these conditions. Consumer credit in 2008 has been growing at its slowest pace since 1994. Business growth and purchases are discouraged by high level of interest charged on borrowings.
It would be difficult for Sainsbury to grow at a rate of 6-7% in a market that is growing at 2-3% (www.ft.com)
3. BARGAINING POWER OF CUSTOMERS
Bargaining power of customer is been affected by the worst economy condition and increased rate of inflation in these past years. Bargaining power of customers is a threat to the company as customers can easily switch to another competitor like Tesco, Asda and Morrison. So Sainsbury must think about it to compete in this competitive environment.
4. POLITICAL AND LEGAL ISSUES
Because of immense size of Sainsbury there would be some political and legal issues which will hinder the further growth of this organisation. Further growth of big retail business like Sainsbury poses threat to small business in UK. “The market dominance of UK supermarket giants Tesco, Asda, Sainsbury's and Morrisons is to be investigated for the third time in seven years”. (Articles:Supermarkets in competition probe, news.bbc.co.uk)
Supermarket business in UK is not just about selling food and non food items, in my observation these big retailers go on war daily with each other .To achieve competitive advantage they have to cut prices as their business strategy can mainly be classified as being cost leader in the market. These price cuts may involve some extreme steps like selling some products on no profit basis or even on loss.
Sainsbury has undoubtedly shown great commitment to achieve targets mentioned in recovery plan but as this analysis report shows that its sales and profit figure are far behind Tesco and because of Tesco's huge portfolio of national and international operations, it will be difficult for Sainsbury to achieve sales and profit figures like Tesco, if it continue operating in UK alone.
To achieve high turnovers and to be more competitive in UK's market, Sainsbury will surely have to broad its horizons and roll out its brand internationally.
Recently many private equity lead consortium and overseas investors have taken interest in Sainsbury because of its improving financial performance and position. These are good signs for Sainsbury's future prospects.
I expect Sainsbury's to achieve better like for like sales growth percentage over the coming areas as Tesco has lesser opportunities of future growth as it is under pressure from competition commission. Sainsbury should take advantage of this situation.
Sainsbury sales revenue has shown growth of 11% between 3 year period (2006-2008), it has been catching up with Tesco in like for like sales especially from the Christmas of 2007.
Sainsbury is already better than Tesco in terms of gearing which means for further growth it is easy for Sainsbury to borrow money at lower interest rates for business expansion than Tesco.
Sainsbury's operational costs are decreasing relative to its increasing sales due to its effective cost strategy under the recovery plan. Sainsbury is also doing well in terms of liquidity as its current and quick ratios are considered healthy according to industry norms. Tesco is weaker in liquidity as compared to Sainsbury.
In a nutshell, Sainsbury is now in a phase called “From Recovery to Growth”. Its performance over last three years is encouraging. These growth and better results will increase Sainsbury's share price and market value in coming year. Therefore I recommend potential investors and also current investors to further invest in Sainsbury.