Death by a thousand price cuts.

Photographer: ADEK BERRY/AFP/Getty Images

German Minnows Nibbling U.K.'s Sainsbury's to Death

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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J Sainsbury, one of the U.K.'s big four supermarkets, today posted its first earnings decline in a decade. Unfortunately, the presentation it prepared for investors suggests it hasn't quite woken up to its new reality. Sainsbury's should be far less worried about its traditional competitors and far more concerned about two German discounting minnows that are threatening to nibble it to death.

Here's the key chart the company produced to show its performance against what it regards as its peers:

Source: Sainsbury

Missing from the chart, which Chris Bailey at investment research firm Financial Orbit first pointed me to, are figures for either Aldi or Lidl, the privately owned German chains responsible for snatching market share from their bigger competitors. Aldi now has 5.4 percent of the U.K. grocery market, up from 4.8 percent in January, while Lidl has taken 3.8 percent, up from 3.5 percent; Sainsbury's is down to 16.5 percent from 16.9 percent.

Profit margins at Sainsbury's have declined for the first time since at least 2005, according to analysts at Bloomberg Intelligence. That's to be expected in the middle of a price war with discounters. More worryingly, all-important Internet sales growth -- Brits have been world leaders at signing up to have their groceries delivered to their homes, the benefit of a small, densely populated island with decent road infrastructure -- has fallen off a cliff for Sainsbury's:

Sainsbury's shares fell as much as 4.7 percent today -- their biggest drop in seven months -- although the broader U.K. stock market rose a tad. That reflects a continuing underperformance against Tesco, its bigger competitor which has a market share of 28.4 percent:

Tesco has gained 25 percent in the past six months as its new management radically reorganizes its business by halting store expansion and making plans to sell offshoots including Dunnhumby, its consumer data arm. Investors are rewarding its newfound pragmatism. Sainsbury's shares, by contrast are unchanged in the same period.

Chief Executive Officer Mike Coupe said today that changes in his industry are coming at the fastest pace in three decades; but I've trawled the 47-page investor report three times now, and I still can't find a single mention of Aldi or Lidl. Until Sainsbury's acknowledges where the real threat to its business is coming from, it'll have a tough time adjusting to its new environment. 

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