Wednesday 7 January 2015

Sainsbury's - Elephant-management in the main aisle...

With a less than expected fall in its third quarter, and confirmation of their convenience and quality credentials, there are many things right about Sainsbury’s.

Bearing in mind that the reported results reflect the whole of Sainsbury’s business, NAMs will have already compared their brands’ performance to check fair shares at category level.

However, in order to optimise opportunities, it is necessary for NAMs to go beyond Mike Coupe’s understated warning that "The outlook for the remainder of the financial year is set to remain challenging…” and explore possible issues and implications, ideally ahead of the competition.

Essentially, Sainsbury’s have to be considering the following:

Space redundancy
Like the other multiples, Sainsbury’s are probably occupying retail space that is 20% in excess of need, especially out-of-town. This means they will close and sell off some low-profit outlets. (See impact here )

However, this leaves some outlets that are too big for purpose in terms of the company’s current offering. These require re-engineering in terms of possibly franchising redundant space for complementary categories that might benefit from Sainsbury’s pulling power.

Meanwhile, there are instore theatre opportunities for suppliers in appropriate categories, providing that the resulting numbers exceed current-use performance…

Commercial Income
With Tesco re-negotiating its supplier contracts (see yesterday’s KamBlog below) it is likely that other multiples will have to follow suit.

This could mean that significant amounts of supplier trade investment will transfer into front margin, with a strong possibility (as you know, in current retail, only yesterday is certain!) that this will result in price-cuts sufficient to neutralise the discounters….

Whilst Sainsbury’s will probably edge upmarket to optimise their strengths at Waitrose end of the field, they will need to keep one foot firmly in mass retail and follow Tesco…

Meanwhile, the multiples and their suppliers need to re-assess their use of trade investment /commercial income as per the UK Financial Reporting Council (FRC) warning (see details).

Hopefully, proactive management of these two elephants will leave some time to deal with other distractions like food price deflation, flat-line demand and increasingly savvy consumers…

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