LONDON: Sainsbury’s plans to cut costs, dividends and new store openings to fund cheaper prices, increasing the pressure on ailing larger rival Tesco to respond in the battle for British supermarket customers.
Sainsbury’s had outperformed competitors for years, with a strategy focused on its own-brand products and the quality of its food, while expanding its convenience and online businesses.
However, it too has been hurt by the rise of German discounters Aldi and Lidl which has sparked an increasingly vicious price war, posting falling sales over its last three quarters.
With Sainsbury’s shares down a third over the last year, new Chief Executive Mike Coupe had been under pressure to show he could avoid the deeper problems faced by Tesco and smaller rival Morrisons.
“We absolutely have made sure that we’ve got the cash resources to deal with whatever scenarios that we can envisage in the market place ... We are very aware that there is somebody (Tesco) limbering-up in the changing rooms,” Coupe told reporters yesterday.
Chief Financial Officer John Rogers added the firm did not foresee any need to raise equity.
Tesco, also reeling from a £263m ($416m) accounting scandal, has been underperforming for longer and is also dominant in the weakest part of the market — big out-of-town supermarkets that have fallen out of favour with shoppers. New Tesco boss Dave Lewis is expected to try to defend market leadership with price reductions of his own.
Aldi is also expanding, with plans to invest more than £600m on new stores over eight years.
Sainsbury’s shares were down 1.6 percent at 264.6 pence at 1548 GMT after Coupe forecast supermarket like-for-like sales would fall for the next few years.
Sainsbury’s will invest an additional £150m on lower prices in targeted products such as nappies over the next 12 months, meaning profitability will be lower in the second half of its financial year than in the first.
It will fund the reductions through cost savings of 500 million pounds over the next three years and a reduction in capital expenditure to 500-550 million pounds a year over the next three years, down from 888 million pounds in 2013-14.
While Sainsbury’s kept its interim dividend at 5.0 pence a share, it said its full-year dividend was likely to be lower than last year’s 17.3 pence. Dividend cover will be fixed at 2.0 times earnings for 2014-15 and the following three years. “I feel that’s a bit of a mistake ... but it’s probably not as big a cut as some people had expected,” one Sainsbury’s shareholder said.
He also questioned the logic of the price cuts. “I would have preferred them just to tough it out,” he said.
Last month Tesco slashed its interim dividend by 75 percent.
Sainsbury’s posted a statutory pretax loss of £290m for the six months to September 27. That reflected exceptional charges of £665m, mainly impairment charges on existing stores and the property pipeline. Some 40 stores Sainsbury’s had planned to develop will not now be built.
Reuters
