Sainsbury’s braces as supermarket price war puts pressure on profits

Sainsbury’s is bracing itself for a full-blown price war with rival supermarkets as it told shareholders to expect profits to fall or flatline this year. 

The chain, which is Britain’s second biggest supermarket, expects its income to fall by £1billion this year as it ramps up investment in lowering grocery prices for shoppers. 

Simon Roberts, the boss of Sainsbury’s said the group had expanded its Aldi Price Match to ‘more products than ever before’ and had 9,000 products with Nectar Prices. 

Roberts said the group had invested £1billion into lowering prices for shoppers over the past four years. 

Sainsbury’s launched Aldi Price Match in its convenience stores in November and claimed it was the first grocer to do so. 

On Thursday, the group said this approach resulted in a ‘rapid and significant improvement in value for money customer satisfaction scores’. 

Last week, Tesco conceded that it could take a significant hit if it is forced to cut prices after Asda revealed its would reduce grocery costs for shoppers in a bid to boost the embattled chain’s fortunes. 

Richard Hunter, head of markets at Interactive Investor, said: ‘With the sector about to be embroiled in a trade war of its own, Sainsbury is preparing for the fight with some added momentum which should provide some protection.

‘Supermarkets may be about to embark on a price war and Asda’s aggressive assault on prices, if it fully happens, will likely shave profits across the sector.’    

With supermarkets battling to lure in shoppers with lower prices, consumers struggling with high living costs could be in for some relief.  

On Thursday, Sainsbury’s said it plans to open 15 new stores in the current financial year, and over the next two years plans to add over 400,000 sq. ft. of new space. 

The group said this represented its ‘most significant investment in new supermarket space for many years’. 

Sainsbury’s said it was also gearing up to open 50 new smaller convenience stores over the next two years. 

The supermarket chain said sales of its Taste the Difference ranges jumped 15 per cent in the year, with fresh food options proving particularly popular. 

In its preliminary annual results, Sainsbury’s reported that sales and profits grew over the year to March.

It said full-year sales, excluding fuel, increased by 4.2 per cent to £26.6billion as it upped its share of the grocery market.

The supermarket’s retail underlying operating profit jumped 7.2 per cent to £1.03billion for the year.

Sainsbury’s told shareholders that these profits will be about £1billion for the new financial year as stronger sales volumes are expected to be offset by weaker profitability.

Grocery sales rose 4.5 per cent during the period, while sales at its Argos arm fell 2.7 per cent to £4.9billion.

Sainsbury’s said it has started the new financial year with ‘good trading momentum’ across all its brands after Argos grew in the final quarter.

In January, Sainsbury’s announced it would cut 3,000 jobs as it closed down its remaining cafés and shut its patisserie and pizza counters.

The supermarket said the move would ‘simplify the business’, adding that most Sainsbury’s shoppers ‘do not use the cafés regularly’.

Roberts said: ‘We’ve transformed our business over the past four years. We have created a winning combination of value, quality and service that customers love, investing £1 billion in lowering our prices. 

‘More people are choosing Sainsbury’s for their main grocery shop as a result, delivering our highest market share gains in more than a decade.’ 

Aarin Chiekrie, an equity analyst at Hargreaves Lansdown, said: ‘Sainsbury’s delivered a sweet set of full-year results, with both revenue and profits moving higher. 

‘The group has transformed itself in recent years. Things like Aldi price match and Nectar prices have been expanded across more products than ever before and are doing a great job at keeping customers loyal. 

‘And a herculean effort to improve its products, value perception, and innovation more generally has helped Sainsbury deliver its highest market share gains in more than a decade, cementing its position as the number two supermarket in the UK.

‘With operations focused on this side of the Atlantic, President Trump’s tariffs pose little threat to disrupt operations directly.’

Hunter, of Interactive Investor, said: ‘The share price has suffered along with the sector as a whole and has fallen by 10 per cent so far this year, leading to a decline of 3.5 per cent over the last year as compared to a gain of 5.5 per cent for the wider FTSE 100. 

‘In addition, despite the progress, a relatively warm reception to the numbers and its undemanding valuation, Tesco remains the preferred play in the sector, with the market consensus for Sainsbury currently coming in at a hold, albeit a strong one.’ 

Sainsbury’s shares rose 3.87 per cent or 9.60p to 257.60p on Thursday.