Advertisement

Sainsbury’s boss is getting out at the right time – so should you

Supermarket chain Sainsbury's faces a lot of problems. Indeed, the future looks grim for the sector as a whole. Ed Bowsher explains why, and where to put your money instead.

14-01-30-Sainsburys
The future for big supermarkets looks grim

Sainsbury's boss Justin King is stepping down.

He's going out on a high: the supermarket group is unquestionably in a far better state than when King took over ten years ago, and the papers have been full of praise for the man who turned it around.

But let's not forget another supermarket boss who went out on a high Tesco's Sir Terry Leahy. When he stepped down in 2011, he went out as a titan of British business.

Advertisement - Article continues below

Three years on, his legacy looks somewhat tarnished. Burning more than a billion quid on trying to break into the US was a massive mistake; under-investing in the company's core UK stores was arguably an even bigger one.

When Sir Terry left in March 2011, Tesco shares traded at over 400p - now they're at 320p. That's a loss of 10%, if you include dividend payments. That's pretty rancid given that the FTSE 100 is up 22% (with dividends) since then.

Advertisement
Advertisement - Article continues below

Sainsbury's has done a little better up 5.6% with dividends. But, like Sir Terry, I think King is getting out at the right time the future for the big supermarkets looks grim. Here's why

Justin King has done a lot to turn around Sainsbury's

One big achievement was to get the basics right. When King took over, Sainsbury's was having huge logistics problems. I remember occasions when I couldn't find staples such as a can of peas in a large Sainsbury's store.

Advertisement - Article continues below

These issues were quickly sorted and King worked to ensure that Sainsbury's provided the food that its middle-class customers wanted. That led to 36 quarters in a row of like-for-like sales growth an impressive achievement.

King also drove the expansion of the Sainsbury's Local convenience store chain. It remains a lot smaller than rival Tesco Express, but it's been a great success even so. The key point is that King was smart enough to spot that this was a genuine growth opportunity for supermarkets, unlike his counterparts at Asda or Morrisons.

King unlike Leahy - also avoided attempts to empire build overseas, and most importantly, the chain's market share has grown. At the end of 2013, Sainsbury's overtook Asda to become the UK's second-largest supermarket once again, with its highest market share since 2003.

And yet, in spite of these achievements, I'm lukewarm about King at best.

But Sainsbury's faces much bigger long-term problems

I can see why King hasn't wanted to hike margins too much. He's wanted to counter the perception that Sainsbury's offers poor value compared to the other big supermarkets. But these low margins mean that the big jump in sales under his reign hasn't converted into a similar leap in profits.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

As Andrea Felsted pointed out in the FT, last year pre-tax profits came in at £756m, not much higher than the £670m when King took over. In the end, shareholders invest for profit, and Sainsbury's isn't generating enough.

What's more, recent sales performance at Sainsbury's has only been so-so. Like-for-like sales grew by 0.2% in the 14 weeks to January, which isn't the kind of send-off you'd expect from someone who has been an unqualified success.

The core problem is that all of the big four' supermarkets (Tesco, Sainsbury's, Asda and Morrisons) are very vulnerable to competition from Lidl and Aldi at the bottom of the market, and from Waitrose at the top.

Online retail is also causing huge disruption. Sainsbury's has built a decent market share in online, but we don't know how much profit is being made, if any. As the shift to online continues, profitability could even fall.

Advertisement - Article continues below

This competition will only intensify. And as it does, it will become clear that while King did a decent job of improving the running of Sainsbury's, he didn't push through the sort of transformation that the big four really need to compete in this rapidly-changing sector.

Smart-alec financial engineering won't save the supermarkets

This is the sort of smart-alec financial engineering that could give a big short-term boost to shareholder value, but could also end in disaster if the supermarkets struggle to pay rising rent bills in the future. Particularly if they've been loaded up with debt in the process (just look at what happened to the pub companies before the last crash).

In any case, as online shopping continues to grow, how much is a big, out-of-town retail box really worth? Perhaps not as much as the property bulls might hope.

To be clear, I suspect King's reputation will be stronger than Sir Terry's by 2016. But then, he doesn't have quite as far to fall. And whatever happens, I have no intention of buying shares in Sainsbury's or any of the other big four. There's too much competition and not enough growth.

The grim reality (for the supermarkets, if not their customers) is that there are too many of them, and there needs to be a massive, probably painful, shake-up of the sector before they might be worth considering as value plays.

For now, there are far more exciting stock market opportunities elsewhere - Japan, small caps, commodities even some of the better emerging markets. Even if you're looking for dividend income, there are better options elsewhere try big pharma, or even big oil.

And if you really want to buy into UK retail, I'd stick with a company like Next (LSE: NXT) it's not cheap, but in terms of business strategy, it's almost impossible to fault.

Our recommended articles for today

Don't be scared of emerging markets

I'm thinking of shorting Apple

Advertisement
Advertisement

Recommended

Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020
Share tips: eight stocks that should deliver robust returns
Share tips

Share tips: eight stocks that should deliver robust returns

Ryan Ermey of US publication Kiplinger’s Personal Finance chooses his favourite stocks for the next decade, which should be able to grow for years.
28 Dec 2019
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
20 Dec 2019
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
13 Dec 2019

Most Popular

Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020
Platinum: the precious metal that looks set to play catch-up with silver and gold
Silver and other precious metals

Platinum: the precious metal that looks set to play catch-up with silver and gold

Gold and silver continue to soar, but there's still time to get in. And there's another precious metal that looks set to go on a bull run too, says Jo…
7 Aug 2020
The MoneyWeek Podcast: how to age well and profit from the “longevity dividend”
Investment strategy

The MoneyWeek Podcast: how to age well and profit from the “longevity dividend”

Merryn talks to economist and author Andrew J Scott and discusses how we can profit from the "longevity dividend" as we live longer; why we need to re…
6 Aug 2020