Profits rise again for Sainsbury's
Outgoing Sainsbury's boss Justin King has capped his decade in charge of the supermarket by announcing a ninth successive year of annual profits growth, but warned of tough times ahead.
Underlying profits before tax rose 5.3% to £798 million in the year to March 15, but like-for-like sales for the period were almost flat, edging up 0.2%.
Mr King, who will hand over the reins of the grocer to commercial director Mike Coupe in July after 10 years in charge, said a focus on quality, affordable own-brand products had helped Sainsbury's succeed in a tough retail environment.
But he warned: "While the general economic outlook is showing some signs of improvement, conditions in the food retail sector are likely to remain challenging for the foreseeable future as customers continue to spend cautiously."
Mr King's swansong as chief executive has been marred by the grocer's most recent set of periodic trading figures which showed a fall in like-for-like sales after 36 consecutive quarters of growth.
Profits are expected to decline next year after Mr King's departure with the supermarket warning that the current year will again see a nearly flat like-for-like sales performance.
Sainsbury's said the latest update was not expected to alter analysts' expectations of a fall in underlying profits to £762 million.
The results come as the Big Four supermarkets - also including Tesco, Asda and Morrisons - look set for a price war as they try to head off the threat of discounters Aldi and Lidl which have been gnawing away at their market share.
Sainsbury's acknowledged that the behaviour of "savvy" shoppers topping up their weekly supermarket visit with a trip to discounters or convenience stores had become "entrenched", but appeared to hold back from plunging into a discount spree.
It said: "The UK grocery market remains intensely competitive and the lack of volume growth means that retailers must work harder than ever to attract and retain customers.
"The growth of the discounters has put pressure on the Big Four and contributed to a high level of price investment across the sector, particularly on everyday food items, and conditions are likely to remain challenging for the foreseeable future.
"However, consumers continue to value quality, freshness and provenance when choosing where to shop.
"Sainsbury's has a clearly differentiated offer, based on quality own-brand products, sourced with integrity, priced fairly and labelled transparently, and supported by a great in-store experience."
Sainsbury's said its premium Taste the Difference range achieved double digit growth with more than £1.1 billion in annual sales. Sales of its "basics" range declined but the brand has been relaunched.
It took a £92 million hit to its balance sheet after scrapping planned supermarket developments - though it still opened 13 supermarkets during the year and extended six, adding a million square feet of space.
There is now a much greater focus on its network of smaller convenience stores, with 91 opened in the year, taking their total number above the number of supermarkets for the first time, and reaching sales of £1.8 billion.
Meanwhile annual online grocery sales, up 12%, have surpassed £1 billion, while general merchandise and clothing sales were growing at twice the rate of food, with the Tu clothing brand generating revenues of around £750 million.
Mr King brushed off concerns about the change in the leadership at the supermarket - in the wake of the woes of Tesco after Philip Clarke took over from long-serving boss Sir Terry Leahy.
He said: "We all know the stories of where management change has caused a problem and there are plenty of businesses where it hasn't."
The chief executive said his successor Mr Coupe had been instrumental in Sainsbury's success over the past decade, adding: "I am very confident the business will go on from strength to strength."
He talked down the idea of a price war to take on the likes of Aldi and Lidl, describing recent discounting initiatives by rivals as "PR announcements" that were part of the regular "cut and thrust" of the industry.
"There has been a tremendous amount of concentration on the German discounters because they have seen a good chunk of growth in the last two or three years. But it is also true that convenience stores have been too.
"Whatever happens in the price skirmishes that we are seeing, we have a business very well equipped to succeed in that environment."
He said Sainsbury's was "quietly looking at the detail, making sure we stay competitive" but added: "We are not making any PR announcements today on price."
Mr King appeared to reject the idea that supermarkets are facing a major upheaval in the landscape of the industry.
He said: "I don't see it as a new environment because price has always been part of the competitive environment as long as I have been in this industry."
But he acknowledged that many of its prices are down on a few months ago, with the cost of staples such as milk, bread and eggs falling.
Incoming boss Mr Coupe said: "Our price position is as strong as it has ever been."
Sainsbury's results highlighted that its market share remained at 16.8% - still its highest for a decade. Rivals have seen declines in the face of the discounter threat and the group said its growth was ahead of "big four" rivals.
Capital expenditure for the year of £888 million was well below market expectations as the group spent less on logistics, IT, and land for future development.
Full-year like-for-like sales growth of 0.2% was well below earlier guidance of 1-1.5%. The first half of the year saw growth of 1.4%, which slumped to a decline of 1.1% in the second half.
This was dragged down by a 3.1% fall in the fourth quarter, as sales compared with a strong period in the previous year when Sainsbury's said competitors had been hit by the horsemeat scandal.
Average "trading intensity" in stores declined from £19.27 per square foot to £18.93, caused by the higher proportion of space for general merchandise and clothing, which trades less intensively than food.
Sainsbury's said developing beyond its core business in areas such as in-store pharmacies, mobile phones, ebooks and household energy was part of its long-term strategy for the future.
But it said: "Some of the businesses in this area are not progressing as quickly as we would have liked."
It pointed to the "Mobile by Sainsbury's" network, a joint venture with Vodafone, which had "not progressed as quickly as expected".