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J Sainsbury may still need the blockbuster deal (that Asda wasn’t)


The latest trading update from J Sainsbury PLC (LON:SBRY) revealed the supermarket chain had a good Christmas but challenges remain for new boss Simon Roberts.

Roberts got his hand on the tiller last year on June 1, taking over from Mike Coupe, whose days always looked numbered after he was just about the only person in Britain surprised that the Competition and Markets Authority (CMA) blocked the company’s takeover of Leeds-based rival Asda in April 2019.

A case of trouble at t’deal.

A long way off the lead and with rejuvenated rivals snapping at its heels

The collapse of the merger left market pundits wondering where next for Sainsbury’s, which continues to lag a long way behind sector leader Tesco PLC (LON:TSCO) in market share, while others snap at its heels.

Those others include Asda, now owned by petrol station magnates the Issa brothers, who will be hoping to make a better fist of owning the chain than its previous owner, US behemoth, Wal-Mart did.

Also on Sainsbury’s tail is Morrison (Wm) Supermarkets PLC (LON:MRW), keen to make up for its (very) late entry into online shopping with its partnership with Amazon.

Among the host of other competitors are the German hard discounters, Aldi and Lidl, which have had (perhaps) surprising success in appealing to a middle-class clientele that one might imagine would be Sainsbury’s core base.

Apparently, even Jerry and Margo Ledbetter (of 70s BBC sitcom “The Good Life” fame) are partial to a keenly priced Cuiver Reserve Chateau Bottled Nuit San Wogga Wogga (which has “a bouquet like an aborigine’s armpit”), and the chance to buy a hosepipe when they only popped into the store to buy a chocolate-covered biscuit & caramel snack called Twax.

The most recent figures from market research group Kantar showed Sainsbury’s market share at the end of 2020 was around the 15.9% mark, with Tesco leading the pack on 27.3%.

Asda was on 14.3%, Morrisons 10.4%, Aldi 7.4% – interestingly, down from 7.8% at the end of 2010 – and Lidl was on 6.1%, just ahead of the dear old Co-op on 6.0%.

Waitrose, the place where middle-class shoppers go when their local Sainsbury’s gets a bit too plebeian, had a market share of 5.0%.

Argos acquisition was a surprising success; what next?

Sainsbury’s share was down one-tenth of a percentage point from a year earlier when it stood at 16.0% and that was largely the story under previous chief executive Mike Coupe’s watch; a case of running to stand still.

To be fair to Coupe, he did have some successes, notably, the acquisition of Argos of 2016, a company that theoretically could have been Britain’s answer to Amazon (without the tax avoidance and dubious employment practices) had it made the shift to online 10 or 15 years earlier.

At the time of the deal, investors wondered how Coupe and co would unlock synergies from the acquisition but the plan to open Argos outlets in some of Sainsbury’s larger stores in order to draw in extra footfall worked well.

Acting as a customer magnet seems to be Argos’s main purpose now, at least in terms of its physical stores, although the online operation seems to be doing well. In November of last year, the company announced plans to close 420 Argos stores by March 2024, as part of the new boss’s restructuring strategy that will also see the closure of all meat, fish and deli counters within Sainsbury’s supermarkets, due to lower customer demand.

The new strategy is focused on “putting food first” unless that food is fresh meat, fish and smoked hams and cheeses from the deli counter.

Not for Sainsbury’s the Aldi or Lidl model of offering shoppers the chance to buy a scuba diving outfit or a leopardskin rug in the shape of Madagascar along with their weekly groceries.

The group has pledged to lower food prices and accelerate food innovation, tripling the number of new products it launches each year.

Every supermarket talks about offering “consistently good value” but in Sainsbury’s case, its long-held reputation of not being the cheapest has hurt in its quest to fight off the German hard-discounters who, for all my quips about their bizarre “here today, gone tomorrow” bonkers product selection have been very astute in offering enough high-quality (if obscure) products to tempt in well-to-do shoppers.

It’s a dog-eat-dog world out there, although so far as I know none of the supermarkets have stooped to that level of product innovation. Horse meat in lasagne, on the other hand …

Be that as it may, the idea of “food innovation” seems a good one; shoppers need a reason to shop at Sainsbury’s rather than a competitor and it probably won’t be because of price, so it might as well be the chance to buy chocolate-covered slices of aubergine, of whatever new products they come up with.

The orange-liveried supermarket has also committed to continuing to reduce plastic and food waste, which is another ambition shared by its competitors, but it should go down well with those shoppers who pop into the store to buy The Guardian.

The company is also looking to continue to profitably grow “Groceries Online” sales to meet further demand; well, who isn’t?

Finally, in contrast to the days when every supermarket chain was expanding like crazy with edge-of-town hypermarkets, the company is looking to increase the rate of new Convenience store and Neighbourhood Hub openings over the next three years, in response to the “shop for little and often” trend.

Still running to stand still?

All sensible stuff but the suspicion is that this will only continue the record of slowing its gradual decline in market share.

Another big merger may be in order, perhaps this time with Sainsbury’s being the one taken over, although that will only happen with the consent of the Qatari Investment Agency, which has owned about a quarter of Sainsbury’s share capital since it backed an abortive private equity bid for the supermarkets group back in 2007.

The Asda deal was a non-starter but it is not beyond the realms of possibility at the rate at which Marks and Spencer PLC (LON:MKS) is becoming a shadow of its former self that we could one day see Sainsbury, Marks and Spencer PLC listed on the stock exchange.

Margo Leadbetter might approve of that combination, although even my younger colleagues know she would not be seen dead in Sainsbury’s; she’s more of a Fortnum & Mason gal I imagine.

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