Trading with Sainsbury’s Full year 2016/17 results and strategic priorities May 17 © IGD 2017 Introduction This insight report was prepared by: 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. © IGD 2017 Page 2 Results in brief +14.1% -0.6% 16.1% Group retail Sainsbury’s Market sales share1 A transformational year LFL 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. © IGD 2017 Notes: Kantar Worldpanel market share is 12 weeks to 23.04.17. LFL is inc-VAT and ex-fuel Page 3 Channel performance 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. © IGD 2017 Source: Sainsbury’s, Total sales growth Page 4 Category performance 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. © IGD 2017 Source: Sainsbury’s, Total sales growth Page 5 Key areas of focus for Sainsbury’s 1 Renewing the food proposition 2 Upgrading own label 3 Renewing supermarkets 4 Innovating with convenience 5 Online expansion 6 Integrating Argos © IGD 2017 Page 6 Renewing the food proposition 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. © IGD 2017 Page 7 Upgrading own label 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. © IGD 2017 Page 8 Renewing supermarkets 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. © IGD 2017 Page 9 Innovating with convenience 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.