If Morrisons is holding the gun, J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US)Â believes the bullet is a blank. As we’ve seen with the cost of eggs, bread and milk recently, Sainsbury’s will cut prices tactically to compete with its rivals.
But as far as an all out price war? They haven’t built much of an air raid shelter. Take a look at this:
| Â | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|
| Margin (%) | 3.3 | 3.4 | 3.5 | 3.5 | 3.6 |
Sainsbury’s margins have increased in the last five years, but still lag some way behind Tesco (averaging 5.6% during the same period) and Morrisons (4.2%).
That doesn’t leave Sainsbury’s with much room to maneuver.
Headaches
Justin King accomplished a lot during his time as chief executive, but he’s had his critics for failing to substantially increase margins.
In 2013, £1.1bn in extra sales generated just £44m in extra profits. Depending on your school of thought, pre-tax profit is among the main indicators of a business’s health.
The problem is that Tesco’s £2bn profit this year, coupled with the potential for a recovery in sales, means that in the event of a collision it could tear through its smaller competitor.
Of an impending price war, Mr King, the outgoing Sainsbury’s boss commented:
“We have responded to every price cut that has been made and we will continue to respond to any made in the future. This feels a bit like a phoney price war. Customers that go into rivals’ stores might be a bit disappointed.”
Of course, you’d expect him to play down fears. Moreover, if the powder keg blows, he’ll be safely out of range, and his successor Mike Coupe will be picking up the scattered debris.
Investors are more than aware that King might be getting out at an opportune moment. Shares dipped 2% on the announcement of his departure, and to date in 2014 the shares are down 15%.
More worrying is that market share decreased to 16.5% from 17% in the 12 weeks to 30 March.
Will business pick up?
Sainsbury’s formerly stood resolute against the onslaught from discounters Aldi and Lidl. It was the only big grocer to maintain its market share over Christmas, drawing level with Asda.
Sales have increased in nine of the last 10 years:
| Â | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|---|---|---|---|---|
| Sales (£bn) | 18.2 | 16.6 | 17.3 | 18.5 | 19.3 | 20.4 | 21.4 | 22.9 | 24.5 | 25.6 |
Instead of growing profits in tandem with sales success, King’s strategy was to offer better value than his competitors.
Sales fell in the three months to 15 March, however, with signs that the discounters nibbling at the heels are finally having an effect. How can Sainsbury’s afford to invest in price cuts without slashing profitability?
Somehow it’s going to have to find a way to stay competitive.
