Sainsbury Eases Concern Over Margins Amid ‘Phony War’ on Prices

J Sainsbury Plc, the U.K.’s third-largest grocer, eased concern that it may be forced to cut prices, saying reductions announced by supermarkets including Tesco Plc amount to a “phony war.”

Tesco’s price reductions, along with those introduced by Wm Morrison Supermarkets Plc and Wal-Mart Stores Inc.’s Asda, apply only to a limited number of products, Sainsbury’s incoming Chief Executive Officer Mike Coupe said today. The grocer isn’t changing its November forecast for an improved full-year margin, Chief Financial Officer John Rogers said.

“Our margins are as healthy as our competition,” Rogers said in an interview on Bloomberg Television after Sainsbury reported the first quarterly decline in same-store sales in more than nine years.

Tesco, Asda and Morrison have all announced plans to reduce prices in response to the advances of German discounters Aldi and Lidl, which are attracting growing numbers of shoppers. Sainsbury said it hasn’t seen any significant change in industry pricing, though will be able to respond should it need to.

“In relative firepower terms, we don’t feel disadvantaged if the phony war becomes a real one,” Chief Executive Officer Justin King said on the call.

The shares rose as much as 3.2 percent to 321.4 pence, boosted by Rogers’s comment that Sainsbury is standing by its November forecast for a “similar” margin performance in the second half of the financial year to the 7 basis-point improvement seen in the first half.

Sales Slide

“We’re not expecting to see consensus change as a result of what we say today,” Rogers said.

Sales at stores open at least a year fell 3.1 percent, excluding fuel, in the 10 weeks ended March 15, London-based Sainsbury said today. The median estimate of 14 analysts in a Bloomberg News survey was for a 2.7 percent drop.

The decline comes amid the grocery market’s slowest growth since 2005, CEO King said in a statement. Britain’s biggest grocery chains, including Tesco and Asda, are losing market share as more consumers switch to Aldi and Lidl and the upscale Waitrose. Those retailers have taken 3.5 percentage points of market share from competitors over the past three years, researcher Kantar Worldpanel said March 11.

“Today’s results show that even the darling of the grocery sector is no longer insulated from the discount threat,” Natalie Berg, global research director at Planet Retail in London, said by e-mail. “There are more ways to shop than ever, but at the same time people are putting fewer items in their basket. This puts a huge amount of strain on retailers like Sainsbury’s. Top line growth is no longer a given.”

Tesco Cuts

Should competitors step up price cutting, Sainsbury will have to respond, putting the margin at risk, said Clive Black, an analyst at Shore Capital in Liverpool, England.

“At the same time, management is right to be sensible and not engage in all the huffing and puffing out there,” Black said. “Sainsbury is not a price setter.”

With an operating margin of about 3.5 percent, Sainsbury may have less room for maneuver on prices than Tesco, which has a U.K. margin of about 5.2 percent and said last month it will spend an additional 200 million pounds ($333 million) a year making permanent cuts to prices on everyday items such as carrots and cucumbers.

Sainsbury has matched prices on milk, bread and eggs and the retailer has “the bandwidth to compete aggressively on price,” Rogers said.

At the same time, “strategically, we don’t see the need to aim off the things that have served us well in the long term,” said King, who is due to be succeeded by Coupe in July. He cited an emphasis on fresh food provenance and investment in premium own-brand products, which now account for 51 percent of sales.

“We still believe Sainsbury will continue to be a relative outperformer operationally,” Citigroup Inc. analyst Pradeep Pratti said in a note. “The company was able to grow profits as the rest of the industry saw declines and while we expect margins to come under some pressure, the declines are likely to be smaller compared to those at peers.”

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