Trading with Sainsbury's - Full year 2016/17 results and strategic priorities - IGD.com

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Trading with Sainsbury's - Full year 2016/17 results and strategic priorities - IGD.com
Trading with Sainsbury’s
             Full year 2016/17 results and strategic priorities

                                    May 17

© IGD 2017
Trading with Sainsbury's - Full year 2016/17 results and strategic priorities - IGD.com
Introduction                                     This insight report was prepared by:

                                                               Nick Gladding            Nick specialises in providing insight
                                                               Senior Retail Analyst    on retailers’ strategic development
                                                                                        and sector trends, and leads IGD’s
                                                               nick.gladding@igd.com
                                                                                        UK market and channel forecasts.
                                                               @nickgladding                 He also delivers bespoke
                                                                                        presentations and projects to IGD’s
                                                               @RetailAnalysis                       customers.

    2016/17 was a landmark year for Sainsbury’s
    that included the acquisition of the Argos and
    Habitat brands and the launch of four new
    priorities to frame strategy in the years
    ahead.

    In this report we review Sainsbury’s newly
    released annual results and explore the
    opportunities created for suppliers from its
    drive to create a differentiated proposition
    that meets changing shopper needs.

© IGD 2017                                                                                                                      Page 2
Trading with Sainsbury's - Full year 2016/17 results and strategic priorities - IGD.com
Results in brief
                                                                                          +14.1%                         -0.6%                     16.1%
                                                                                          Group retail                  Sainsbury’s                  Market
                                                                                             sales                          LFL                      share1
    A transformational year

      Group retail sales increased by 14.1%,
      (inc.VAT, ex fuel), driven by a 14.5%                                Sainsbury’s four strategic priorities
      contribution from Argos.
      Sainsbury’s LFL sales declined by 0.6%.
      The rate of LFL decline moderated from -
      1.0% in H1 to -0.1% in H2, as price deflation
      eased.
      The £1.1bn Home Retail Group
      acquisition has made Sainsbury’s one of
      the largest non-food retailers with £6bn of
      clothing and general merchandise sales.
      Newly acquired Argos achieved strong
      LFL growth of 4.1% in H2 with LFL growth
      of 20-30% for Argos stores located in
      Sainsbury’s supermarkets that have been
      open for more than a year.
      Retail underlying profit fell by 1.4% to
      £626m, reflecting lower LFL sales,                                                                        Mike Coupe, CEO
      investment in the customer offer and cost                                                                 “This has been a pivotal year and we have made
      inflation.                                                                                                significant progress delivering and accelerating our
                                                                                                                strategy. Sainsbury’s Group offers customers market-
      Underlying retail margin declined by 32
                                                                                                                leading product choice, value and convenience,
      basis points to 2.42%. Sainsbury’s has a
                                                                                                                whenever and wherever they shop with us”
      margin target of 3-3.5% over a three to five
      year period.
© IGD 2017          Notes: Kantar Worldpanel market share is 12 weeks to 23.04.17. LFL is inc-VAT and ex-fuel                                                          Page 3
Trading with Sainsbury's - Full year 2016/17 results and strategic priorities - IGD.com
Channel
    performance

    Growth channels compensate for
    decline through supermarkets
    To support shoppers’ desire to shop more
    frequently across different channels and
    store formats, Sainsbury’s has stepped up
    investment in online and continued to
    expand its Local store network.
    The growth of these channels and the               Supermarkets -1.8%         Convenience +6.5%         Online +8.2%
    continuing expansion of the discount sector
    has put pressure on volumes through core           To adapt to the gradual    Convenience benefited     Online sales were lifted
    supermarkets, though Sainsbury’s expects it        shift in shopper demand    from the opening of a     by the launch of a new
    to remain the leading channel in grocery.          away from full weekly      net 33 new shops, half    groceries app, the
                                                       shops in supermarkets,     the number of the prior   expansion of grocery
                                                       Sainsbury’s has been       year, though sales        click & collect and the
                                                       remodelling space at its   growth only dropped       launch of same day and
                                                       larger stores to better    slightly (from 9%). The   one hour delivery
                                                       align them with customer   new stores included       services. Sainsbury’s
                                                       requirements for speed,    seven franchise           also opened its first
                                                       flexibility and            forecourts in             purpose built online
                                                       convenience. During the    partnership with Euro     fulfilment centre to
                                                       year it opened only six    Garages forecourts,       increase capacity in
                                                       supermarketNine Elms s,    extending Sainsbury’s     London.
                                                       including the flagship,    coverage in the North.
                                                       and closed two.
© IGD 2017   Source: Sainsbury’s, Total sales growth                                                                               Page 4
Trading with Sainsbury's - Full year 2016/17 results and strategic priorities - IGD.com
Category
    performance

    Resilience in food

    Against a backdrop of a highly challenging
    grocery market, Sainsbury’s core food
    business demonstrated resilience, benefiting
    from targeted investments to make its
    proposition more distinctive. Bold new ‘Food
    Dancing’ advertising also helped Sainsbury’s
    to build traction with younger and urban            Food -0.5%                 Clothing +4.3%             Gen Merchandise +2.4%
    shoppers.
                                                        Despite a slight decline   Sainsbury’s is now the     Sainsbury’s is adjusting
    Sainsbury’s non-food businesses
                                                        in sales a strong and      sixth largest clothing     its offer to reduce
    demonstrated good growth and play an
                                                        differentiated food        retailer in the UK by      overlap with Argos and
    increasingly important role to support footfall
                                                        remains at the heart of    volume, with strong        improve product
    at its larger stores and are now
    complemented by Argos.                              the Sainsbury’s            positions in               presentation in-store.
                                                        proposition. Major         womenswear and             New more regularly
                                                        developments in            childrenswear, and         refreshed ranges are
                                                        2016/17 included the       opportunities for future   helping to drive footfall,
                                                        completion of upgrades     growth in menswear.        as is greater activity
                                                        to the quality of 3,000    The launch of Tu           around seasonal events
                                                        own brand products and     premium womenswear         such as Christmas and
                                                        the removal of multi-      in September has           Halloween.
                                                        buys.                      helped to grow basket
                                                                                   size.

© IGD 2017    Source: Sainsbury’s, Total sales growth                                                                                  Page 5
Trading with Sainsbury's - Full year 2016/17 results and strategic priorities - IGD.com
Key areas of
    focus for
    Sainsbury’s
                   1   Renewing the food proposition

                   2   Upgrading own label

                   3   Renewing supermarkets

                   4   Innovating with convenience

                   5   Online expansion

                   6   Integrating Argos

© IGD 2017                                             Page 6
Trading with Sainsbury's - Full year 2016/17 results and strategic priorities - IGD.com
Renewing the
    food
    proposition

    To enhance its appeal with customers
    Sainsbury’s continues to focus investments
    in price or quality, depending on the
    importance of these factors to its customers
    at category level.
    For commodity products and everyday
    essentials Sainsbury’s has reduced prices
    significantly. Chicken fillets and cheese for                                             What next?
    instance are about third cheaper than a few
    years ago.
    For speciality products, Sainsbury’s mainly                                               70 range reviews are planned for the
    invests in adding quality and utility to                                                  rest of 2017/18, covering 40% of
    products to provide unique reasons for                                                    sales, to build on the 53 range reviews
    shoppers to choose Sainsbury’s.                                                           carried out since the start of Q3, to
                                                                                              create a more distinctive offer.
    Linked to this Sainsbury’s has driven its
    ‘value simplicity’ programme, to put more       Reducing spend on deal
    emphasis on lower and more stable prices        The removal of multi-buys last year
    and make the business less dependent on         was a key factor in a six percentage
    promotions.                                     point fall in promotional participation
                                                    last year. The move has helped
                                                    increase availability, improve supply
                                                    chain efficiency and cut wastage.

© IGD 2017                                                                                                                              Page 7
Trading with Sainsbury's - Full year 2016/17 results and strategic priorities - IGD.com
Upgrading own
    label
                                                  Targeting snacking occasions               ‘Deliciously FreeFrom;
                                                  Snacking sales have grown strongly         Sainsbury’s has doubled the number of
                                                  since the launch last summer of            products in the newly relaunched range
    Sainsbury’s has completed its programme to    Sainsbury’s On the Go range. This £8m      to include fresh, frozen, chilled and
    upgrade the quality of 3,000 own brand        investment introduced new sandwich and     ambient ranges. Sainsbury’s has also
    products but will continue to make targeted   bread options, salads and sushi. The       become the first supermarket to offer
    investments in product quality.               range was further enhanced this May        gluten-free freshly baked bread in-
                                                  with the addition of Asian buns, gluten-   store.
    Investment has been concentrated on the       free sandwiches and vegan options.
    core by Sainsbury’s range, which achieved
    2% volume uplifts over the year.
                                                                                             What next?

                                                                                             More investment in fast growing
                                                                                             categories is likely as Sainsbury’s
                                                                                             continues to adapt its offer to changing
                                                                                             customer demand.
                                                                                             Expect further action to remove salt
                                                  Prepared vegetable innovation              and sugar from products as part of
                                                                                             Sainsbury’s drive to help customers
                                                  Following strong demand for courgetti      lead healthier lives.
                                                  (courgette spaghetti) and boodles
                                                  (butternut squash noodles).                Sainsbury’s has also begun trialling
                                                  Sainsbury’s has launched eight more        new budget fresh produce range,
                                                  lines this year that have helped to        ‘Greengrocer’s Value Selection’ to
                                                  drive double digit growth in prepared      replace basics.
                                                  vegetables category.
© IGD 2017                                                                                                                          Page 8
Trading with Sainsbury's - Full year 2016/17 results and strategic priorities - IGD.com
Renewing
    supermarkets

                                                    Argos                                       Sushi Gourmet and Patisserie Valerie
                                                    Sainsbury’s now has 59 Argos digital        Patisserie Valerie cakes now strengthen
    Sainsbury’s repurposed around 250,000 sq ft     stores in its supermarkets and 207          the offer at 12 in-store counters,
    of space in 2016/17, following through on a     digital collection points. To date these    presented in the luxury brand’s own
    2014 pledge to make better use of under         relocations have created 1-2% halo          boxes. Sainsbury’s also reports
    traded space at 25% of its portfolio by 2019.   uplifts for Sainsbury’s food and non-food   encouraging results from its 20 branded
                                                    sales.                                      sushi concessions.
    Relocating Argos stores to Sainsbury’s
    supermarkets and enhancing the clothing
    and general merchandise offer are key parts
    of this strategy and Sainsbury’s is also                                                    What next?
    working with external partners to make better
    use of store space, such as Sushi Gourmet,
    and most recently, Patisserie Valerie.                                                      Sainsbury’s is on track to open a total
                                                                                                of 250 Argos digital stores in its
    With basket size in decline, Sainsbury’s is                                                 supermarkets within three years with
    also making macro space changes to to                                                       the pace of the programme influenced
    make stores more convenient for changing                                                    by leases expiries on high street
    shopper missions through its new Foodhall                                                   stores.
    theme. Its commitment to retaining food at      Habitat
                                                                                                10 Mini Habitat stores will open in
    the heart of its offer is also being            Eight Mini Habitat stores have opened       2017/18
    strengthened by the bold new food dancing       to date to support Habitat’s multi-
    campaign.                                       channel business strategy,                  30 more stores will host sushi
                                                    strengthening Sainsbury’s home offer.       counters by year end, bring the total to
                                                                                                50.

© IGD 2017                                                                                                                                 Page 9
Trading with Sainsbury's - Full year 2016/17 results and strategic priorities - IGD.com
Innovating with
    convenience

                                                   Slowing expansion                         Euro Garages
                                                   Sainsbury’s opened 41 new                 Eight forecourt stores have now opened
    Sainsbury’s convenience business now           convenience stores and closed eight       at sites owned by Euro Garages in the
    delivers £2.5bn of annualised sales, up over   in 2016/17, half the net increase of      north of England. Franchising offers
    6% on 2015/16, and achieves positive like-     the previous year. In total it now        Sainsbury’s a low risk model to reach
    for-likes.                                     operates 806 Local stores                 more shoppers in areas where it under
                                                                                             indexes.
    Sainsbury’s benefits from a high quality
    estate, biased towards London and the
    South-East and metropolitan areas. This
    helps sales densities at its Local stores to                                             What next?
    generally exceed those of its main
    competitors.
                                                                                             Sainsbury’s plans to open c.25 more
    As the convenience channel has matured,                                                  convenience stores in the year ahead
    Sainsbury’s has opened increasingly                                                      but will maintain rigorous return on
    compact stores, whose range needs to be                                                  investment criteria to maintain the
    skilfully curated to maximise traction with                                              quality of its estate.
    local shoppers.
                                                   Relevant ranges                           While it is too soon to gauge the
                                                                                             success of its tie-up with Euro
                                                   Range selections are increasingly         Garages, Sainsbury’s is optimistic
                                                   tightly tailored to local catchments as   about the potential to franchising to
                                                   Sainsbury’s takes on more smaller         extend its reach and is open to
                                                   store units.                              working with new partners.

© IGD 2017                                                                                                                           Page 10
Online
    expansion

                                                         Grocery app                                Same day delivery
                                                         Over 10% of orders are now                 Same day delivery is now offered from
    Sainsbury’s grocery online sales grew by 8%          received through Sainsbury’s               29 stores across the UK and
    to reach £1.3bn of annualised grocery sales.         groceries app, which was launched          Sainsbury’s is trialling one hour delivery
                                                         last summer, and helps to deepen           to parts of West London through its
    Orders grew by 12% to 276,000 per week               the loyalty of online shoppers.            Chop Chop trial cycle delivery service.
    and average order size dropped.

    A new picking system has been introduced to
    speed up order assembly and deliver fresher
    products to customers.                                                                          What next?
    The opening of Sainsbury’s first online
                                                                                                    Sainsbury’s will continue to focus on
    fulfilment centre gives it vital extra capacity in
                                                                                                    driving profitable growth in online,
    London where it expects online sales to
                                                                                                    rather than driving sales growth.
    double over the next eight years.
                                                                                                    More experimentation and a wider
                                                                                                    rollout of rapid delivery options is likely
                                                                                                    to counter the challenge from Amazon
                                                         Click & Collect                            Prime Now.
                                                         While still a small part of Sainsbury’s    Couponing through Argos could be an
                                                         online business, grocery click & collect   effective tactic to grow Sainsbury’s
                                                         now operates from around 150 sites         online customer base.
                                                         and provides crucial additional
                                                         capacity at peak periods.                  Alibaba’s Tmall platform in China
                                                                                                    continues to offer opportunities for
                                                                                                    own brand exports.

© IGD 2017                                                                                                                                    Page 11
Integrating
                                                                                                                                        59
    Argos                                                                        £3.2bn                 +4.1%
                                                                                                         H2 sales                      Digital
                                                                                 Argos sales              growth                    stores now
                                                                                                                                      trading

                                                                                               Argos Digital stores
    Integration proceeding at pace
                                                                                               Stores that have been open for more than a year are
    Argos is performing well both commercially                                                 delivering sales growth of 20-30%. There is also a halo
    and operationally, delivering an underlying                                                benefit to grocery sales at host Sainsbury’s stores of 1-2%.
    profit contribution of £77m.                                                               Relocating stores to Sainsbury’s supermarkets is also
                                                                                               driving availability at Argos availability and making stock
    Sainsbury’s focused on delivering the                                                      holding more efficient.
    synergies outlined in its investment case at
    the time the acquisition was announced and is
    confident with the Argos business model.                                                   Mobile drives digital growth
    Sainsbury’s now expects to conclude its                                                    Argos is now the third most visited website in the UK,
    synergies plan six months earlier than                                                     with mobile visits up from 66% to 76% of the total over
    originally stated, in March 2019. By then 250                                              the last two years. Fast Track delivery within four hours
    Argos stores at Sainsbury’s supermarkets                                                   is a unique strength for Argos, with sales up 59%. Fast
    should have opened.                                                                        Track collections sales are up by 48%.

                                                                                               Significant further opportunities
                                                                                               Sainsbury’s sees many additional opportunities beyond
                                                                                               .
                                                                                               those set out in its investment case at the time the
                                                                                               merger was announced. Argos’s two man delivery
                                                                                               service for instance could allow it build its position in
                                                                                               unconsolidated categories such as furniture. Growing
                                                                                               international sourcing is another opportunity.
© IGD 2017   Source: Sainsbury’s, Argos sales, inc. VAT and financial services                                                                             Page 12
Our view       Less than a year on from completing its landmark acquisition of
                   the Argos and Habitat brands, Sainsbury’s is making good progress
                   towards its goal of creating a leading multichannel food general
                   merchandise, clothing and financial services retailer.

                   While it is still early days, Argos is already delivering
                   encouraging results, both commercially and operationally. It offers
                   exciting opportunities for long term growth as well as more immediate
                   benefits to Sainsbury's stores as its relocation programme progresses.

                   Sainsbury’s food proposition is becoming more clearly
                   differentiated with a distinctive offer, now underpinned by
                   increasingly innovative own brand products. In a challenging
                   market, adding value and utility to its product offer should drive
                   customer loyalty and create unique reasons for shoppers to choose
                   Sainsbury’s.

                   Sainsbury’s investment in online and convenience will offset the
                   expected continuing fall in supermarkets contribution to its sales
                   mix. Franchising offers a low risk way to extend Sainsbury’s
                   convenience footprint further while continuing investment in online will
                   strengthen this channel further.
                   Sainsbury’s now offers shoppers a much clearer value
                   proposition, following the removal of multi-buys and a dialling down
                   of promotions. These actions should enable Sainsbury’s to continue to
                   invest in price in products that matter most to its customers, deepening
                   customer loyalty.

                   New thinking at supermarkets, including an overhaul of counters,
               6   the re-working of the non-food offer and working with new
                   partners provides Sainsbury’s with plenty of options with which to
                   upgrade its store estate and make itself more relevant to shopper
                   missions.

© IGD 2017                                                                                    Page 13
Want to know more?

    The IGD Sainsbury’s Trade Briefing

             This event is a great opportunity for current and potential Sainsbury’s suppliers to learn how Mike Coupe and the senior team are
                                                            ‘Building a new Sainsbury’s Group’.
          The morning plenary will provide a complete corporate and commercial update. In the afternoon, there will be key business unit
       breakouts where Sainsbury’s Directors will share practical, best practice examples of how they are putting the strategy into action, and
                                               what they are looking for from suppliers in 2017/18.
        We’ll conclude our day with topic based break-out sessions, and an opportunity for you to book 1-to-1 meetings with the Sainsbury’s
                                                                  buying team.

    Need something else?                                               BOOK HERE

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© IGD 2017                                                                                                                                        Page 14
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