Sainsbury’s Business Dynamics & Strategies

Part 1: Sainsbury’s Business Dynamics & Strategies

Business Dynamics & Strategies

Sainsbury’s (J Sainsbury PLC) is the second largest supermarket chain in the UK, after Tesco with market share estimated at 16.5% according to Kantar Worldpanel (Rojas, 2017). Sainsbury’s business segments are divided into three major operations: Retailing, Financial Services, and Property Investments. Sainsbury’s primary business focus is grocery retailing. Besides, Sainsbury’s is also involved in general merchandising and clothing retailing through the brand Argos, a leading brand in both high street and online retailing.

As of 30th April 2018, Sainsbury’s had announced its agreement with Walmart Inc. to combine Sainsbury’s and Asda (Asda Group Ltd) to create a new retail business in the UK. Referring to the market share data provided by Kantar Worldpanel, Asda is placed third in the table in terms of market shares at 15.6%. Assuming constant market share across Sainsbury’s, Tesco, and Asda, the merger would then place Sainsbury’s top on the list with the largest market share.

Market Prospects

At time of its announcement, the market had responded positively with its share price surging up to £3.09 per share, about 15% increase in value from its previous trading day:

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Figure 1: Sainsbury's 1-year historical prices (LON: SBRY). Source: Google Finance

Sainsbury’s strategic merger can help the group to roll out long term cost-saving strategy due to its increase in buying power. This allows more room for negotiation with suppliers and manufacturers amidst challenging business environment for lower cost.

Associated Risks

According to Sainsbury’s 2018 financial report (Sainsbury’s, 2018), the risks associated to Sainsbury’s business and strategy can be summarized as below:

1. Competitive Risk: Sainsbury’s major competitors such as Tesco had also implemented similar strategy including membership on retaining customer loyalty and the offering of personal banking services. Its brand perception could also be of disadvantage against its largest competitor, Tesco, as Tesco operates on a multi-national level with higher brand recognition compared to Sainsbury’s.
2. Major Incidents Risk: Following the acquisition of Nectar and Argos, the increase size and complexity of the business had increased the chance of major incident occurring due to its larger exposure. The risk control is also expecting heavier if the merger with Asda was to go through. More resources would need to be allocated on managing such risk such as the drafting of risk mitigation policies and structural change of its business.
3. Strategic Risk and Change: With the trend of customer preference constantly changing, Sainsbury’s needs to be agile in changing the way it operates as well. As such, as the frequency of business changes rises, there is a higher risk of failing a business mandate. The merger and acquisition activities carried out by the group in the recent years would also mean adapting constant changes more frequently.

The risk surrounding Sainsbury is largely driven by both its management and from a micro level due to its M&S activities in the last 5 years. Since the vote results of Brexit, Sainsbury’s had been performing well which had shown that the business is not too affected by the market turmoil on a macro level.

Part 2: Historical Performance and Ratio Analysis

Historical Performance

From 2014 to 2016, Sainsbury’s had been going through restructuring of its business which included a cost cutting plan in 2016. As seen in the figure 2 below, Sainsbury had declining sales between year 2014 and 2016 with increased operating expenses nearing the same level as its sales in 2015. Following the restructuring and cost cutting plan, the business had begun to pick up relatively well between 2016 and 2018, with an average of 10% year-on-year growth. The operating expenses were also well controlled, with its yearly sales staying on average 2.5% above its level of expenses.

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Figure 2: Total Revenue, Total Operating Expense (LEFT) and Net Income (RIGHT) of Sainsbury's. Source: FT.com

Following the profit downturn in 2016, the subsequent restructuring was nonetheless a successful attempt. This fact be further reinforced by the trend of Sainsbury’s net income in the last 5 years as seen in figure 2 above.

Debt-to-Equity Ratio

Over the last 5 years, Sainsbury’s had engaged in two major acquisitions, the purchase of Home Retail Group in April 2016 which includes Argos and the purchase of Nectar in February 2018. Based on Sainsbury’s financial statement, these purchases could likely be made through debt financing. Debt-to-equity ratio is used here to help understand Sainsbury’s financial risk. A ratio higher than 1.00 means that a company is financing its business or M&A activities through debt rather than its shareholder’s equity.  

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Figure 3: Debt-to-Equity Ratio of Sainsbury's. Source: FT.com

From figure 3 above, Sainsbury’s debt-to-equity trend has two spikes, one in 2015 and one is 2018. This trend matches the merger and acquisition made by Sainsbury’s. Also, based on the historical trend, Sainsbury’s had been using debts to finance its activities over the last 5 years. Similar data for its competitors includes a debt-to-equity ratio of 3.27 from Tesco, which indicates heavy financing through debt, and a ratio of 1.13 from Morrison, which is a relatively conservative financing. In order to assess Sainsbury’s ability to meet its debts, we have the following ratio analysis.

Current Ratio

Current Ratio is used on the analysis of a company’s liquidity. A higher value indicates a higher level of liquidity and the company is more likely to meet its debt. The ratio is calculated as current assets divided by current liabilities. Here below is Sainsbury’s current ratio over the last 5 years.

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Figure 4: Current Ratio of Sainsbury's. Source: FT.com

The current ratio assumes that all the inventories of Sainsbury’s can be readily converted in cash to meet its financing. A value of less than 1.00 may indicate that Sainsbury’s may require using its operating cash flows to meet its short-term liabilities. Given the trend that it is regaining its financial strength, along with its positive market outlook (merger with Asda), this may be an issue that is well under control. As mentioned earlier, current ratio assumes readily convertible inventories.