Its Britains third biggest supermarket chain. Its also, in my view, dangerously close to losing its very identity.
Kantar Worldpanel a consumer research firm recently revealed that Sainsburys (LSE: SBRY) (NASDAQOTH: JSAIY.US)s market share slipped from 16.6% to 16.2%. Thats not the end of the world, but its not a good sign. Indeed what management would prefer you didnt know is that there appears to be no end in sight to this slide in its market position.
It doesnt add up
Sainsburyss latest official accounts show the supermarket chain suffered a slump in quarterly sales. In fact shares in the company fell to a six-year low on that news. Like-for-like sales, excluding fuel, fell 2.8%. That was the third consecutive quarterly sales fall.
Sainsburyss management are saying everyone needs to calm down. Executives are saying, yes, times are tough, but theyre doing everything they can to bring down costs and streamline the retailers operations. And thats true, the companys made operational cost savings of around 120 million over the past 12 months. In fact that has offset the impact of cost-push inflation during the year.
Theres just one problem: overall costs of sales keep rising. Costs came in around 22.02 billion in the 2013 financial year and rose to 22.56 billion in the last financial year.
Investors are feeling it
So whats the effect of that ongoing squeeze? Investors are losing money. This year Sainsburys reported a dividend of 0.17. City analysts are now forecasting dividends of 0.14 GBP for next year. In that 12-month period alone, shareholders also suffered through a 38% dive in Sainsburys stock market valuation.
The truth will set you free, or will it?
We all know the problem by now. British consumers (still shell-shocked by the Great Recession) are choosing more thrifty ways of obtaining their weekly grocery needs. This plays very well into the business models of the discount retailers Aldi, Lidl and Asda. In fact Aldi and Lidl are currently enjoying double-digit growth.
This wouldnt be such a big problem if it was a short-term phenomenon, but thats becoming less and less likely largely because of inflation. Thats not saying prices will remain low, but more an indication that wages and asset prices will remain subdued and therefore the purchasing power of consumers will remain hindered.
How to make a bad situation worse
News of Sainsburyss latest attempt to evolve did the media rounds earlier this week. The supermarket chain says from the 11th of April 2015 it will be halving the number of Nectar reward points it offers members of its loyalty scheme. From that point onwards customers will earn only one point for every pound spent in store or online, compared with two at points at the moment.
So a quick re-cap, Sainsburys is losing market share, its costs are rising, and now its shedding the one distinctive tool Tesco and Wm. Morrison Supermarkets(LSE: MRW) use to compete with the new and scary discount chains.
And yes, you heard me right, Morrisons has said it will now launch its own loyalty scheme, called Match & More. Its now promised to match prices with Aldi and Lidl. I respect Morrisons courage! Especially considering the scheme is predicted to see the companys profits halve initially. Morrisons is just hoping to knock a little bit of the wind out of the discounters sails. Its still adamant though that its not heading towards becoming a discounter.
Sainsburyss needs to go one way or the other: compete with the big discounters, or move up-market. Within itself too it seems to be compromising its own values. One newspaper picked up on a slice of social media that took a bit of a jab at the grocery chains latest move: Anna McNally said, So @sainsburys will no longer be giving me nectar points for reusing my bags but will be giving out extra points on fuel. Sounds very green..
How can you win the race if youre not even sure which lane youre in?
A friend of mine use to say, ‘it’s not about timing the market, it’s about time in the market‘. So when do you say enough is enough? It’s so easy to stay with a company like J Sainsbury out of loyalty or hopes of a turnaround.
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David Taylor has no position in any shares mentioned. The Motley Fool UK owns shares in Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.