Trading with Sainsbury's

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Trading with Sainsbury’s

Full year 2016/17 results and strategic priorities

May 17

Nick Gladding Nick specialises in providing insight Senior Retail Analyst on retailers’ strategic development and sector trends, and leads IGD’s [email protected] UK market and channel forecasts. @nickgladding He also delivers bespoke presentations and projects to IGD’s @RetailAnalysis customers.

2016/17 was a landmark year for Sainsbury’s that included the acquisition of the Argos and Habitat brands and the launch of four new priorities to frame strategy in the years ahead.

In this report we review Sainsbury’s newly released annual results and explore the opportunities created for suppliers from its drive to create a differentiated proposition that meets changing shopper needs.

Group retail sales increased by 14.1%, (inc.VAT, ex fuel), driven by a 14.5% Sainsbury’s four strategic priorities contribution from Argos. Sainsbury’s LFL sales declined by 0.6%. The rate of LFL decline moderated from - 1.0% in H1 to -0.1% in H2, as price deflation eased. The £1.1bn Home Retail Group acquisition has made Sainsbury’s one of the largest non-food retailers with £6bn of clothing and general merchandise sales. Newly acquired Argos achieved strong LFL growth of 4.1% in H2 with LFL growth of 20-30% for Argos stores located in Sainsbury’s supermarkets that have been open for more than a year. Retail underlying profit fell by 1.4% to £626m, reflecting lower LFL sales, Mike Coupe, CEO investment in the customer offer and cost “This has been a pivotal year and we have made inflation. significant progress delivering and accelerating our strategy. Sainsbury’s Group offers customers market- Underlying retail margin declined by 32 leading product choice, value and convenience, basis points to 2.42%. Sainsbury’s has a whenever and wherever they shop with us” margin target of 3-3.5% over a three to five year period.

Growth channels compensate for decline through supermarkets

To support shoppers’ desire to shop more frequently across different channels and store formats, Sainsbury’s has stepped up investment in online and continued to expand its Local store network. The growth of these channels and the Supermarkets -1.8% Convenience +6.5% Online +8.2% continuing expansion of the discount sector has put pressure on volumes through core To adapt to the gradual Convenience benefited Online sales were lifted supermarkets, though Sainsbury’s expects it shift in shopper demand from the opening of a by the launch of a new to remain the leading channel in grocery. away from full weekly net 33 new shops, half groceries app, the shops in supermarkets, the number of the prior expansion of grocery Sainsbury’s has been year, though sales click & collect and the remodelling space at its growth only dropped launch of same day and larger stores to better slightly (from 9%). The one hour delivery align them with customer new stores included services. Sainsbury’s requirements for speed, seven franchise also opened its first flexibility and forecourts in purpose built online convenience. During the partnership with Euro fulfilment centre to year it opened only six Garages forecourts, increase capacity in supermarketNine Elms s, extending Sainsbury’s London. including the flagship, coverage in the North. and closed two.

Resilience in food

Against a backdrop of a highly challenging grocery market, Sainsbury’s core food business demonstrated resilience, benefiting from targeted investments to make its proposition more distinctive. Bold new ‘Food Dancing’ advertising also helped Sainsbury’s to build traction with younger and urban Food -0.5% Clothing +4.3% Gen Merchandise +2.4% shoppers. Sainsbury’s is now the Sainsbury’s is adjusting Sainsbury’s non-food businesses Despite a slight decline sixth largest clothing its offer to reduce demonstrated good growth and play an in sales a strong and retailer in the UK by overlap with Argos and increasingly important role to support footfall differentiated food volume, with strong improve product at its larger stores and are now remains at the heart of positions in presentation in-store. complemented by Argos. the Sainsbury’s proposition. Major womenswear and New more regularly developments in childrenswear, and refreshed ranges are 2016/17 included the opportunities for future helping to drive footfall, completion of upgrades growth in menswear. as is greater activity to the quality of 3,000 The launch of Tu around seasonal events own brand products and premium womenswear such as Christmas and the removal of multi- in September has Halloween. buys. helped to grow basket size.

1 Renewing the food proposition

2 Upgrading own label

3 Renewing supermarkets

4 Innovating with convenience

5 Online expansion

6 Integrating Argos

To enhance its appeal with customers Sainsbury’s continues to focus investments in price or quality, depending on the importance of these factors to its customers at category level. For commodity products and everyday essentials Sainsbury’s has reduced prices significantly. Chicken fillets and cheese for What next? instance are about third cheaper than a few years ago. For speciality products, Sainsbury’s mainly 70 range reviews are planned for the invests in adding quality and utility to rest of 2017/18, covering 40% of products to provide unique reasons for sales, to build on the 53 range reviews shoppers to choose Sainsbury’s. carried out since the start of Q3, to create a more distinctive offer. Linked to this Sainsbury’s has driven its ‘value simplicity’ programme, to put more Reducing spend on deal emphasis on lower and more stable prices The removal of multi-buys last year and make the business less dependent on was a key factor in a six percentage promotions. point fall in promotional participation last year. The move has helped increase availability, improve supply chain efficiency and cut wastage.

Targeting snacking occasions ‘Deliciously FreeFrom; Snacking sales have grown strongly Sainsbury’s has doubled the number of since the launch last summer of products in the newly relaunched range Sainsbury’s has completed its programme to Sainsbury’s On the Go range. This £8m to include fresh, frozen, chilled and upgrade the quality of 3,000 own brand investment introduced new sandwich and ambient ranges. Sainsbury’s has also products but will continue to make targeted bread options, salads and sushi. The become the first supermarket to offer investments in product quality. range was further enhanced this May gluten-free freshly baked bread in- with the addition of Asian buns, gluten- store. Investment has been concentrated on the free sandwiches and vegan options. core by Sainsbury’s range, which achieved 2% volume uplifts over the year. What next?

More investment in fast growing categories is likely as Sainsbury’s continues to adapt its offer to changing customer demand. Expect further action to remove salt Prepared vegetable innovation and sugar from products as part of Sainsbury’s drive to help customers Following strong demand for courgetti lead healthier lives. (courgette spaghetti) and boodles (butternut squash noodles). Sainsbury’s has also begun trialling Sainsbury’s has launched eight more new budget fresh produce range, lines this year that have helped to ‘Greengrocer’s Value Selection’ to drive double digit growth in prepared replace basics. vegetables category.

Argos Sushi Gourmet and Patisserie Valerie Sainsbury’s now has 59 Argos digital Patisserie Valerie cakes now strengthen Sainsbury’s repurposed around 250,000 sq ft stores in its supermarkets and 207 the offer at 12 in-store counters, of space in 2016/17, following through on a digital collection points. To date these presented in the luxury brand’s own 2014 pledge to make better use of under relocations have created 1-2% halo boxes. Sainsbury’s also reports traded space at 25% of its portfolio by 2019. uplifts for Sainsbury’s food and non-food encouraging results from its 20 branded sales. sushi concessions. Relocating Argos stores to Sainsbury’s supermarkets and enhancing the clothing and general merchandise offer are key parts of this strategy and Sainsbury’s is also What next? working with external partners to make better use of store space, such as Sushi Gourmet, and most recently, Patisserie Valerie. Sainsbury’s is on track to open a total of 250 Argos digital stores in its With basket size in decline, Sainsbury’s is supermarkets within three years with also making macro space changes to to the pace of the programme influenced make stores more convenient for changing by leases expiries on high street shopper missions through its new Foodhall stores. theme. Its commitment to retaining food at Habitat 10 Mini Habitat stores will open in the heart of its offer is also being Eight Mini Habitat stores have opened 2017/18 strengthened by the bold new food dancing to date to support Habitat’s multi- campaign. channel business strategy, 30 more stores will host sushi strengthening Sainsbury’s home offer. counters by year end, bring the total to 50.

Slowing expansion Euro Garages Sainsbury’s opened 41 new Eight forecourt stores have now opened Sainsbury’s convenience business now convenience stores and closed eight at sites owned by Euro Garages in the delivers £2.5bn of annualised sales, up over in 2016/17, half the net increase of north of England. Franchising offers 6% on 2015/16, and achieves positive like- the previous year. In total it now Sainsbury’s a low risk model to reach for-likes. operates 806 Local stores more shoppers in areas where it under indexes. Sainsbury’s benefits from a high quality estate, biased towards London and the South-East and metropolitan areas. This helps sales densities at its Local stores to What next? generally exceed those of its main competitors. Sainsbury’s plans to open c.25 more As the convenience channel has matured, convenience stores in the year ahead Sainsbury’s has opened increasingly but will maintain rigorous return on compact stores, whose range needs to be investment criteria to maintain the skilfully curated to maximise traction with quality of its estate. local shoppers. Relevant ranges While it is too soon to gauge the success of its tie-up with Euro Range selections are increasingly Garages, Sainsbury’s is optimistic tightly tailored to local catchments as about the potential to franchising to Sainsbury’s takes on more smaller extend its reach and is open to store units. working with new partners.

Grocery app Same day delivery Over 10% of orders are now Same day delivery is now offered from Sainsbury’s grocery online sales grew by 8% received through Sainsbury’s 29 stores across the UK and to reach £1.3bn of annualised grocery sales. groceries app, which was launched Sainsbury’s is trialling one hour delivery last summer, and helps to deepen to parts of West London through its Orders grew by 12% to 276,000 per week the loyalty of online shoppers. Chop Chop trial cycle delivery service. and average order size dropped.

A new picking system has been introduced to speed up order assembly and deliver fresher products to customers. What next?

The opening of Sainsbury’s first online Sainsbury’s will continue to focus on fulfilment centre gives it vital extra capacity in driving profitable growth in online, London where it expects online sales to rather than driving sales growth. double over the next eight years. More experimentation and a wider rollout of rapid delivery options is likely to counter the challenge from Amazon Click & Collect Prime Now. While still a small part of Sainsbury’s Couponing through Argos could be an online business, grocery click & collect effective tactic to grow Sainsbury’s now operates from around 150 sites online customer base. and provides crucial additional capacity at peak periods. Alibaba’s Tmall platform in China continues to offer opportunities for own brand exports.

Integration proceeding at pace Argos Digital stores Stores that have been open for more than a year are Argos is performing well both commercially delivering sales growth of 20-30%. There is also a halo and operationally, delivering an underlying benefit to grocery sales at host Sainsbury’s stores of 1-2%. profit contribution of £77m. Relocating stores to Sainsbury’s supermarkets is also driving availability at Argos availability and making stock Sainsbury’s focused on delivering the holding more efficient. synergies outlined in its investment case at the time the acquisition was announced and is confident with the Argos business model. Mobile drives digital growth Sainsbury’s now expects to conclude its Argos is now the third most visited website in the UK, synergies plan six months earlier than with mobile visits up from 66% to 76% of the total over originally stated, in March 2019. By then 250 the last two years. Fast Track delivery within four hours Argos stores at Sainsbury’s supermarkets is a unique strength for Argos, with sales up 59%. Fast should have opened. Track collections sales are up by 48%.

Significant further opportunities Sainsbury’s sees many additional opportunities beyond . those set out in its investment case at the time the merger was announced. Argos’s two man delivery service for instance could allow it build its position in unconsolidated categories such as furniture. Growing international sourcing is another opportunity.

© IGD 2017 Source: Sainsbury’s, Argos sales, inc. VAT and financial services Page 12 Our view Less than a year on from completing its landmark acquisition of the Argos and Habitat brands, Sainsbury’s is making good progress towards its goal of creating a leading multichannel food general merchandise, clothing and financial services retailer.

While it is still early days, Argos is already delivering encouraging results, both commercially and operationally. It offers exciting opportunities for long term growth as well as more immediate benefits to Sainsbury's stores as its relocation programme progresses.

Sainsbury’s food proposition is becoming more clearly differentiated with a distinctive offer, now underpinned by increasingly innovative own brand products. In a challenging market, adding value and utility to its product offer should drive customer loyalty and create unique reasons for shoppers to choose Sainsbury’s.

Sainsbury’s investment in online and convenience will offset the expected continuing fall in supermarkets contribution to its sales mix. Franchising offers a low risk way to extend Sainsbury’s convenience footprint further while continuing investment in online will strengthen this channel further. Sainsbury’s now offers shoppers a much clearer value proposition, following the removal of multi-buys and a dialling down of promotions. These actions should enable Sainsbury’s to continue to invest in price in products that matter most to its customers, deepening customer loyalty.

New thinking at supermarkets, including an overhaul of counters, 6 the re-working of the non-food offer and working with new partners provides Sainsbury’s with plenty of options with which to upgrade its store estate and make itself more relevant to shopper missions.

The IGD Sainsbury’s Trade Briefing

This event is a great opportunity for current and potential Sainsbury’s suppliers to learn how Mike Coupe and the senior team are ‘Building a new Sainsbury’s Group’. The morning plenary will provide a complete corporate and commercial update. In the afternoon, there will be key business unit breakouts where Sainsbury’s Directors will share practical, best practice examples of how they are putting the strategy into action, and what they are looking for from suppliers in 2017/18. We’ll conclude our day with topic based break-out sessions, and an opportunity for you to book 1-to-1 meetings with the Sainsbury’s buying team. Need something else? BOOK HERE

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