Higher food and payroll costs are weighing on J Sainsbury Plc, squeezing the British grocer as it tries to hold down prices for cash-strapped shoppers.
(Bloomberg) — Higher food and payroll costs are weighing on J Sainsbury Plc, squeezing the British grocer as it tries to hold down prices for cash-strapped shoppers.
The supermarket chain’s shares fell as much as 3% in London even after it reported strong Christmas sales and said profit will be at the higher end of a previously guided range. That’s because of concerns that Sainsbury’s margins will shrink as it struggles to compete in a fiercely contested market.
Sainsbury is having to manage a difficult balancing act as it tries to absorb some of its own surging costs, including another pay hike for staff in February, while at the same time keeping prices keen and shoppers loyal. British supermarkets fought hard to attract customers in the approach to Christmas and German discounters Aldi and Lidl saw record sales as consumers sought to save money on groceries.
“We will deliver for our shareholders but profits will be a bit lower this year than last,” Chief Executive Officer Simon Roberts said on a media call. “Customers are looking for value harder than ever before. You would expect me to be cautious about the year ahead.”
Sainsbury now expects an underlying profit before tax toward the top end of a range of £630 million ($766 million) to £690 million.
Investors had largely “priced in” Sainsbury’s positive festive performance and the results are “no better than expected,” Jefferies analyst James Grzinic wrote in a note to clients.
The grocer said last month that it’s spending an extra £50 million on keeping prices down, taking the total investment to £550 million. This includes price matching discount rival Aldi on around 300 products and increasing the number of own-brand items where the prices are locked for a period of time.
“Sainsbury’s focus on everyday low prices and its Aldi price-match scheme only mitigates market share losses. Meaningful levels of growth look very difficult over the next 12 months,” said Orwa Mohamad, retail analyst at Third Bridge.
Sainsbury also has to contend with the higher cost of staff. The business said this month that it’s investing £205 million in employee pay to boost salaries with staff earning £11 an hour outside London and £11.95 within the capital. Sainsbury is offering an additional six months of free food for employees in stores and depots.
What Bloomberg Intelligence Says:
Sainsbury’s focus on remaining price competitive likely helped boost 3Q23 revenue, but there are still concerns that cost increases — including the third wage hike this fiscal year — will pressure margin in fiscal 2024, with consensus anticipating at least a 10% pretax profit drop.
— Charles Allen, BI retail industry analyst
Sainsbury Improved Peak Sales Can’t Defend Future Margin: React
Roberts said the grocer benefited from people hosting larger gatherings at Christmas once again after two years of Covid restrictions. The football World Cup also boosted sales and shoppers bought early to spread the cost of Christmas given the impact of inflation on spending power.
Sainsbury said retail free cash flow will be £100 million higher than previously guided.
(Updates from lede to show share decline, CEO quote.)
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