J Sainsbury plc is a UK based food retailer with business interest in financial services. The Company's principal activities are grocery, related retailing and financial services. Its businesses are organized into three operating segments: Retailing (Supermarkets and Convenience); Financial services (Sainsbury's Bank joint venture), and Property investment (British Land joint venture and Land Securities joint venture). It operates a total of 872 stores comprising 537 supermarkets and 335 convenience stores which consists of Sainsbury's Supermarkets, Sainsbury's Local, Bells Stores, Jacksons Stores and JB Beaumont and Sainsbury's Online.
The company is headquartered in Holborn, London and employs approximately 150,000 people. Sainsbury is listed on the London Stock Exchange and as of 10th August 9, 2010 has a market capitalization of £6600 million. The current market share of the company is 16.1% in UK.
History and growth
UK supermarket group J Sainsbury was originally founded in Drury Lane, London, in 1869 and grew rapidly during the Victorian era. Its reputation grew for selling high quality products at low prices. It was as far back as 1882 when its strategy of high quality products at premium prices in more affluent areas began to develop. Facing serious competition from larger chains, Drury Lane expanded threefold between 1890-1900 so that he could benefit from purchasing economies of scale and compete with contemporary rivals. From then on the company grew strength by strength. By 1970s it had reached the scale of operation and gained public status so in 1973 the group began life as listed company which at the time was the UK's largest ever flotation. John Sainsbury was Chairman during this period and he remained in control from1969 until 1992. During his stewardship the company pursued a strategy of growth through market development into new geographic areas and new store development in the shape of large out of town outlets. There was expansion in north of England and Northern Ireland. These new formats allowed for a much larger product range and spurred on new product development and innovation. In a ten year period to 1994, its product choice had more than doubled and included product ranges to suit changing consumer tastes such as exotic fruits, reduced fat products etc. Its strategy of innovation also utilized the development of technology through computerized stock control, in store scanning and sales ordering, all of which enabled the company to gain a competitive advantage and become the number one food retailer in the UK.
However Sainsbury's has been unable to sustain its strategic position of market leadership. In 1995,Â Tesco overtook Sainsbury's to become the market leader, andÂ AsdaÂ became the second largest in 2003, demoting Sainsbury's into third place.
The group moved into financial services with the establishment of joint venture between Sainsbury's Bank and Lloyds Banking Group. It also has two property joint ventures with Land Securities Group Plc and The British Land Company Plc.
Product and market Analysis
SWOT is an abbreviation forÂ Strengths, Weaknesses, Opportunities and Threats. SWOT analysis is an important tool for auditing the overall strategic position of a business and its environment. Once key strategic issues have been identified, they feed into business objectives. Strengths and weakness are internal factors whereas opportunities and threats are external factors. It is important to note the strengths and weaknesses are intrinsic value-creating skills or assets, or the lack of, relative to competitive forces. Opportunities and threats are external factors which are not created by the organisation, but emerge as a result of the competitive dynamics caused by future gaps in the market.
The advantage of using swot analysis is that it enables an organisation to spot business opportunities and exploit them fully. It also enables an organisation to anticipate future business threats and take action to avoid or minimise their impact. However, swot analysis may capture too much data and it may be difficult to analysis and come to a conclusion. The problem of accessing to quality internal data can be difficult to get.
Market presence in UK
Sainsbury is one of the oldest supermarkets in UK with a market share of around 16%. It has had thirteen straight quarters of growth showing real turnaround in its business. Sainsbury offers around 30000 products through its 537 supermarkets and 335 convenience stores. The company also has a good market presence in its internet based home delivery shopping services. Strong presence in the UK has not only enhanced the bargaining power of the company but also strengthen its brand image. It has also won "Supermarket of the Year" in 2009 by Retail Industry Awards.
Over the years Sainsbury has developed a private brand portfolio. There are food and non food categories. Under the food category "Taste the difference" (Ttd) is the company's biggest sub brand and the company also offers organic products under "Sainsbury's SO organic" range. In the non food category Sainsbury offers clothing and home and lifestyle products under "TU" and "TU home" brand. Another brand "Basics" is the company's fastest growing own-brand range which comprises of 650 products. In the time of financial crisis private brand portfolio increase profitability
Sainsbury has an extremely experienced leadership team with Justin King, its Chief Executive receiving great praise for his work in Sainsbury's.
Due to Sainsbury's various initiatives and commitments like buying fair-trade goods, it is very well placed on green and environmental issues. Recently, the companies launch of eco-friendly milk bags and jugs have been a major hit among its customers.Â It has a positive consumer brand and it's liked by both green activists and consumers.
Sainsbury's focus on fair prices has a broad appeal and has really helped itself to differentiate from its competitors as well as its introduction of "Shop and Save", "Switch and Save", 'Cook and Save" and "Collect and Save" offers have really worked well especially during this time of recession without compromising on choice or quality.
With Jamie Oliver Sainsbury has seen uplift in its sales of specific ingredients that have been featured in his advertisements. For example, the supermarket had to order nine tons - the equivalent of two years' supply - of nutmeg to meet demand when it appeared in one of Oliver's hundred-plus ads.
In 2008, the takeover bid from Qataris Private equity firm had some implications as people were gravitating towards British companies and the prospect of Sainsbury's being governed by a foreign firm can lead to consumers switching loyalties.
Unlike Sainsbury's expansion plan which is only in UK its biggest competitor is going global, this can lead to trouble especially if there is some problem within food retailing in the UK or if there needs to be a source of extra growth
Temporary IT problem
There had been some problems with online grocery service due to technical problems from its internet service provider there was also problem with its online store and had to be shut down which affected more than 10,000 online shoppers. Suspension of the services could adversely affect goodwill and also lead to loss of customer confidence
Lower return on pension assets
Sainsbury has witnessed significant movements in returns on pension schemes in 2009 as compared to 2008. These have resulted in a reduction of £30 million in the net return on pension schemes, of which £19 million is due to an increase in interest on pension liabilities and £11 million is due to a lower rate of return on pension assets. The associated decline in the value of pension assets has contracted Sainsbury's capacity towards meeting retirement obligations. As of march 2009, the present value of the company's retirement benefit obligations less the fair value of plan assets was a deficit of £222 million as compared to a surplus of £366 million in FY2008. Sainsbury will have to revise its strategy of meeting its retirement obligations.
Sainsbury's alternative business presents an opportunity to diversify risk and future growth. Its investments in property and bank seem a good strategy to pursue. Online sales are also a great opportunity, since online margins are higher and investments are not huge.
Sainsbury has taken a huge initiative in its expansion plan since a long time. In 2009 it opened 51 convenience stores with Total convenience estate coming to 335 stores. It has got plans to open 75 to 100 stores in 2010/11
Healthy food initiative
Consumers are showing increased preference for fat free and organic food products. The company's "1 per cent fat" milk, launched in April 2008, is now consumed in around 2.5 million UK households. The company has reduced the sugar in all of its squash lines by 10%. The company is thus well positioned to benefit from the growing demand for healthy and organic foods.
Recession is a major threat to Sainsbury's operations due to lesser disposable income with the consumers. Based on the falling GDP rates during late 2008 and early 2009, The International Monetary Fund (IMF) estimates that the UK economy has contracted 4.2% in 2009. The property rates had also gone down during this period. These problems result into lesser margins and immense pressure on sales.
Sainsbury faces severe competition from other retailers like Tesco, Asda, Marks and Spencer's and other local stores. Due to intense competition in this sector, Marks and Spencer's and Waitrose are coming up with expansion plans both in the UK and emerging economies like India and China. Increasing competition from these large players could affect Sainsbury's margins and market share.
The recent increase in government taxes (VAT) and the announcement of reduced public spending, will affect sales margin and future investments and infrastructure projects. The increase of vat from 15% to 17.5% on non food items and petrol has been unwelcome and there is a speculation that food prices are likely to be affected.
Porters Five Force Analysis
Porter's Five Forces Analysis was developed by Michael Porter of Harvard Business School in 1979. It is used to understand the competitive and attractiveness of the industry. It is based on the idea that a company gets a competitive advantage if it gets a quicker return on investment than its competitors do. The forces affect the company's ability to make profits and serve its customers. It is very useful tool for the investors and lenders of the firm. It focuses on a single business or market rather than on a particular product or group of products.
Competitive rivals are organizations with similar services aimed at the same customer segments. If there are few barriers to entry, rivalry is high. In the case of Sainsbury whose core business is retail, there is an intense competition. Sainsbury has the market share of 16% in UK (2010). This is a positive trend but it lags well behind the market leader Tesco, showing that there is considerable distance to cover. Other competitors include Asda, Morrison's, Waitrose and M&S who have a different competitive advantage over their competitors. Sainsbury has an advantage because of its growing number of convenience store which reflects in its larger customer reach. Banks are also its competitors but it is not there core business.
Barriers for entry
Barriers to entry are factors that need to be overcome by a new entrant if it wants to compete successfully. The easier the entry for new company in an industry, tougher the competition and vice versa. In the retail industry the barrier to entry is quite high due to many factors. Firstly, organized retail is a complex sector with heavy investments. A significant brand development is also required which takes many years to develop along with customer loyalty. Secondly, the fixed costs and switching costs are high for a start up and finally, local knowledge is very important in this business something which is difficult for foreign firms to replicate. Sainsbury is very well situated in this factor because of its brand and customer loyalty.
Threats of Substitutes
Substitutes are products or services that offer similar benefits but by a different process. Substitution reduces demand for the product as customers switch to different alternatives. The threat of substitutes in retail sector is low as customers view it as a necessity. It cannot be replaced. So the danger for retail industry is very low. The only major threat of substitute is an internal industry threat whereby one supermarket can lap up the business of other supermarkets. The retail industry is also very complex especially in developed countries and are always including new innovations in their respective business. Hence substitution is low
Buyers are the organizations immediate customers and may not necessarily be the ultimate customers. In the case of retailers the buyer power is very high as competition among retailers is intense and the switching cost for customers is low. The factors that affect buying power are prices, customer loyalty and now a days green credentials. In this time of recession consumer needs are given very high preference, increasing their power considerably.
Suppliers supply the organization with what is required to be produced or service. These can include land, labour, finance etc. in retail industry supplier power is more problematical as it is difficult to classify them in categories. Some of the suppliers like P&G, Unilever, Cadbury etc are very big and have a brand appeal. If supermarkets do not sell their products consumers will shift loyalties, making suppliers very powerful and if products of these companies don't reach the supermarkets their sales volumes will be affected. Hence they are mutually dependent. Power of small suppliers won't be considerable because of their limited sales volume.
Chapter 2 (Financial Analysis)
This chapter deals with the quantitative analysis of Sainsbury with regards to its own past performance. The tool used to investigate it is ratio analysis. Financial ratios are used to conduct the fundamental analysis of the company. These ratios enable us to an in-depth understanding of business by systematic review of its financial statements. Most of the financial ratios can be calculated by the information provided in the financial statements. Each ratio that is calculated is detailed with regards to the interest of three different stakeholders (investors, lenders and creditors).
According to Maclaney and Atrill (2002), 'â€¦ratios provide an overview of the business's financial condition'. The ratios are usually grouped into categories each of which relates to particular aspect of financial performance or position. The category of ratios calculated includes liquidity ratios, profitability ratios, efficiency ratios, gearing ratios, investment ratios and cash based ratios. These ratios are widely used to understand the well being of the company. They involve comparison of data from balance sheet or income statement and are dealt with a particular focus in mind.
The importances of financial ratios are many. Firstly, they are simple to use and easy to calculate. Secondly, they enable a person to examine the relationships between unrelated items and aid in decision making. Moreover, they can be used to compare the business performance against itself, i.e. time series analysis or used to compare between other similar businesses i.e. cross sectional analysis or against the industry or particular sector. It also takes into consideration the size of the business and finally, ratios summaries complex financial data into percentages and key indictors.
Although financial ratios provide us an in depth understanding they come up with a set of a limitations. Financial practitioners should be aware of these limitations to get the accurate picture of the firm.
The first limitation of ratio analysis is that the quality of ratio analysis totally depends upon the quality of the financial statement. They automatically inherit the limitations of the statements used. This problem can be solved if resources are provided to a person to make his own statement.
The ratios are also subject to the limitations of accounting standards followed by the company. e.g., companies can use different methods of FIFO or LIFO for its inventories which affect the ratios significantly. The ratios are time sensitive; they can only analyze at the time when the figures are prepared. The usefulness of the particular ratio may depend upon factors like, the type of business, the point in the business cycle, seasonal factors etc.
The second limitation for financial analysis is inflation. Inflation might badly misrepresent a firm's balance sheet. The balance sheet value might be understated because according to accounting convention Balance sheet values are reported at historical cost and are not adjusted for inflation. This problem can be solved by using real (inflation adjusted) figures.
The third limitation of ratio analysis is that it doesn't capture significant off-balance sheet items. Some companies may have significant amounts of off-balance sheet assets and liabilities.
Another problem with ratio analysis is that one cannot exclusively rely on ratios because ratios measures relative performance and positions and provide only part of the picture. For example, the comparisons of ROCE of two companies can be 20 and 25 percent and the one with 25% can sound attractive but one should also look at the absolute value of operating profit which can be more for the company with 20% ROCE. It is therefore important to look at absolute values especially when it comes to profits, capital employed, assets, etc.
The other problem with ratio analysis is that there might be a difficulty to compare among the companies especially those companies who operate in different industries. Difference of choices in financing makes it even more difficult to find a meaningful set of industry-average ratios.
Finally, Ratios are also subject to illegal manipulations through window-dressing of accounts and are more common than investors and regulator would like. A company may have some good or bad rations, making it difficult to judge whether it is a good or bad company. In short financial ratios analyzed in unthinking manner can be dangerous and in contrast if used intelligently, can provide a true picture about a firm's performance.
Liquidity measurements ratios
According to Robinson et. al (2009, p.795) liquidity ratios are 'Financial ratios measuring the company's ability to meet short-term obligations'. This is done by comparing companies' most liquid assets to its short term current liabilities. Higher liquidity ratio suggests that the company can pay of its debts that are due in the near future and still fund its current operations. A lower ratio suggests that the company may have difficulty in continuing its business smoothly and is a bad sign for investors and lenders of the company.
The current ratio compares the liquid assets of the business to its current liabilities. In theory, the higher the current ratio, the better but a too high current ratio may indicate improper utilization of resources.
From the graph above one can observe that the ratio has increased by 22% as compared to 2009. Sainsbury has adequate current assets to match their current liabilities, but it is below the industry average. Investments in current assets have decreased over the period of time. This is because of the rigorous long term venture investments.
Also known as acid test ratio, it is quite similar to current ratio although it represents a more stringent test of liquidity. This ratio is helpful because for many businesses like that of Sainsbury's, inventories cannot be converted into cash quickly. This ratio is useful for
Suppliers, lenders and investors.
The quick ratio indicates an improvement in the current year but it is still below industrial averages. There has been a continuous decline over the period of time because of the long term investment activities. However, liquidity might not be a problem because of Sainsbury's incredible days in payables and receivables period.
Shareholders Funds / Long Term Liabilities - Shows how much worth of Shareholders' Funds exist for every pounds worth of long term debt. It is nothing but Shareholders Funds / Long Term Liabilities.
Shareholders liquidity has increased in the five years. Sainsbury's shareholders have complete faith in the company as the company is managing to remain profitable even in this time of recession and in the long run.
Profitability ratios are good indicators of the financial performance of the company. These ratios gives us a good undestanding of how sucessfully the company utilizes its resources in generating profits and stakeholder value. As profit is the key indicator of the business , it measures the company's use of assets and its control over its expenses. Profiatbility is vital for the survival of the company and hence are important from the investors and lenders point of view.
Gross profit margin
The gross profit margin relates gross profit of the business with the sales revenue genereated. The ratio measures profitability in buying and selling goods before any other expenses are taken into into consideration. In retail industry the cost of goods sold is very high and the profit margins are low.
For sainsbury there has been a steady decline in gross profit margine over the period of time. There was a sharp decline in gross profit especially in the year 2008 which was due to the economic downturn whose effects were experienced by the whole retail industry. There were changes in purchasing behaviour as well, in order to tackle these problems sainsbury focused on cutting wastage and investments in value for money and basic goods were made. Sainsbury also focused on intrnet retailing to increease its sales and manage the inflation of the goods.
Operating profit margin
Also known as net profit margin, it relates operating profit to sales revenue during that period. It is a measurement of how much revenue is left with the company after paying for variable costs and can be used to determine efficiency of operations.
Sainsbury has been successful in its operational efficiency and has shown a steady growth since 2008. This growth has been despite the recession because of Sainsbury's strategic planning and implementation. However OPM is still low as compared to its peer competition Tesco (5.48 %).
Return on capital employed
This ratio compares relationship between the operating profit and the average long term capital investment. It shows how much business is gaining from its assets. In retail industry the ROCE is low because firms have heavy investments in land and also because of low profit margins. For Sainsbury there has been a drop in ROCE by 5.5% as compared with the previous year. In 2009, the ROCE was high mainly because of the proceeds attained from disposal of property which was used to finance overall operations. However, the overall ROCE trend has been quite stable and proves proper utilization of assets.
Efficiency ratios measure the efficiency of a company to do its daily operations such as inventory management turnover of receivables and liability repayments. Some of the ratios are also used to measure firms overall performance in long term basis. Higher efficiency ratios are considered to be good indicators of company operations.
Debtor collection period
This efficiency ratio indicates the time taken by the business to collect the debts owed to it by its customers. In retail industry, the debt collection is low because almost all transactions are done on cash basis. An increase in debtor collection can be due to a bad debt problem or change in companies settlement policies. The ability of Sainsbury to recover debts has improved over the period of time and is doing really great as compared to its competitors.
Creditor turnover period
This ratio measures the average time taken by a company to pay its suppliers. In retail industry this can be distorted as payment periods are different for different suppliers. The suppliers are willing to extend the settlement period to only those retailers who have good reputation and early settlement period. It is better for retailers to have low creditor turnover.
It can be observed that Sainsbury is in a position to recover money from their debtors and later pay to their suppliers. Sainsbury is in a good position but higher creditor turnover can be bad to the business as it may indicate liquidity problems.
Asset turnover ratio
This ratio indicates the effectiveness of the firm's total asset and measures the amount of sales revenue generated over the amount spent in the total assets. In retail industry the asset turnover ratio is high because of low profit margins. Sainsbury is doing well as compared to its peers and indicates a proper utilization of its assets. This analysis is important especially to the lenders and investors of the firm. A vey high turnover ratio may also be a problem because it means that the firm is over investing in its assets in spite of low sales volumes as compared to its competitors.
Stock turnover ratio
This ratio measures the number of days a firm takes to clear its stock and replace it with new stock. In retail industry the lower the number of days, the better performance of the firm as longer period increases cost and indicates bad sales strategies. This ratio can fluctuate if Sainsbury increases or decreases its food items from fresh food category or non food category depending upon the life span of the item. Sainsbury has a balanced stock turnover ratio as compared with industry average standards, and indicates no problem in selling its items.
Sales per employees
This ratio indicates the human resource efficiency of the company. It is the most important aspect of any business and as it shows the core competencies of the firm. In general a higher ratio is considered to be good as it indicate better productivity. Sainsbury has a balanced sale per employee ratio and indicates that Sainsbury can do more sales with fewer employees. Other possibility may be that Sainsbury products are really good and employees have little to do with the sales revenue.
Cash flow ratios:
Cash flow ratios are the best indicators for solvency and liquidity of the company and are not subject to accounting assumptions and allocations. The traditional ratios always suffer from the defects of the financial statement on which they are based. The ratios calculated from financial statements (profit and loss account and balance sheet) are computed using accounting conventions. Hence cash based ratios shows the true image of the company and provide the users a useful control when assessing accounting based performance.The different cash based ratios and their uses are discussed below.
Quality of earning
It is very difficult for outsiders like investors, creditors, etc to determine if earnings are based on the true capabilities and operational capabilities of the company or if it is taking advantage of accounting tricks to artificially increase the profits. This simple ratio helps to determine the quality of the earning and is calculated by dividing cash flow to operating profits. It measures what percentage of profits is represented by cash flow.
The above figure indicates that the quality of earning has gone down at a substantial rate. The reason might be because of high inflation rate In UK and also due to intensive expansion of Sainsbury over the period of time. In spite of this ratio, creditors are getting paid on timely basis and with enough cash Sainsbury will timely pay its financial costs on time.
Quality of Sales
This ratio measures what proportion of reported sales revenue is represented by cash generation. It is closely related to debtor collection period. This ratio is very important for the investors and lenders of the firm. In retail industry the sales revenue and cash collection show similar pattern. The higher the ratio the better for the company as it indicates fewer bad debts and prompt debtor collection period. Following table represents the quality of sales for Sainsbury.
Cash interest coverage ratio
This ratio is used to measure the company's efficiency to pay interest expenses on outstanding debts to its lenders. This ratio is calculated
TheÂ interest coverage ratioÂ is used to determine how easily a company can pay interest expenses on outstanding debt. The ratio is calculated by dividing a company'sÂ earnings before interest and taxesÂ (EBIT) by the company's interest expenses for the same period. The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable.