Merryn's Blog

A word of warning about the VAT hike

Sainsbury's reported good results this week, but there could be pain ahead for food retailers - and the rest of the nation's of shopkeepers.

It's always good to see stunning results from a stock you've been tipping. And at face value, yesterday's results from J Sainsbury (LSE: SBRY) were in the knockout category. Net profits doubled to £585m.

So what's the secret of Sainsbury's success? In fact, the figures include property profits. 'Underlying' profits grew a more mundane 13% on like-for-like sales (ex-fuel), up 4.3%. But that was still better than expected, while the dividend was hiked an inflation-busting 7.6%.

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And though the company threw in the usual caveats about a "challenging environment with consumer spending under pressure", Sainsbury's is clearly in very good nick financially and sounds nicely upbeat about the long-term future.

Nothing really to worry about, then? For J Sainsbury itself, no. But there could be a fly in the ointment for food retailers, and certainly for the rest of our nation of shopkeepers.

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We all know by now that our tax bills will be going up. Our new government simply has to cut the country's huge budget deficit. And it's a racing certainty that VAT now 17.5% - is heading for 20%. That would bring it in line with the European average.

Right now, you don't pay VAT on food. But you might soon have to, at least on some items. Your supermarket bill could rise by up to 20%. And the likes of Sainsbury won't make an extra penny out of it. They'll just be huge unpaid tax collectors for HM Revenue and Customs.

Sainsbury's boss Justin King says today that putting VAT on food is a "bad idea", "bizarre" and "regressive". What he doesn't say is how it would affect Sainsbury's sales, though it's unlikely to help.

But we still have to eat. And if much more of our money ends up in supermarket tills, there'll be a lot less available to spend elsewhere. General, i.e. non-food, retailers will have to compete even harder for sales. That could mean heavy price cuts and much lower profits.

In a nutshell, I still reckon Sainsbury's will be OK, and I'd be happy to stick with the shares for now. But there could be some real pain ahead for stores selling non-essential goods. We'll be writing about what a VAT hike will mean for the rest of the retail sector soon.

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