Sainsbury’s Is Becoming the Sick Grocer of Britain

(Bloomberg Opinion) -- Britons tucked into J. Sainsbury Plc’s value-priced turkey crowns, costing 9 pounds, over the festive period. But its disappointing performance risks turning the group itself into the feast for Britain’s other big supermarkets.

Sainsbury said like-for-like sales across the group fell 1.1 percent in the 15 weeks to Jan. 5, missing analysts’ expectations for a 0.3 percent decline. True, the reporting period includes October and November, which were dismal for British retailers — worth bearing in mind when comparing the chain to the rocketship performance of Aldi, which focused on the much-better week before Christmas.

But Sainsbury usually benefits over the holidays, as customers trade up to its higher-end Taste the Difference mince pies and bronze free-range turkeys. This didn’t happen to the same extent this year. Although the volume of sales held up, lower food price inflation and a trend of shoppers trading down to cheaper products meant the average value per item fell.

Like-for-like grocery sales were slightly positive. However, Argos’s sales were below expectations, and that’s despite the removal of capacity from the market during 2018 as some rivals either disappeared or closed stores.

The report on Wednesday is a worrying sign.

Sainsbury’s Is Becoming the Sick Grocer of Britain

Here’s why: When food-price gains are accelerating, all of the big four supermarkets can prosper at the same time.

Sainsbury’s Is Becoming the Sick Grocer of Britain

When inflation moderates, or there is deflation, grocers need to sell more tins of beans or loaves of bread to generate the same value of sales. That’s a tall order, particularly when the U.K. arms of Aldi and Lidl are taking much of the oxygen out of the market.

In a low=growth environment, the big four need to steal sales from a weaker player. In the past, that has been Tesco Plc and Wm Morrison Supermarkets Plc. Now, it looks increasingly like Sainsbury is about to step into the role.

Sainsbury’s Is Becoming the Sick Grocer of Britain

On top of this, the risks are rising.

Firstly, its 7 billion-pound ($8.9 billion) takeover of Walmart Inc.’s U.K. grocer, Asda, is undergoing scrutiny by competition authorities. Approval hangs in part on whether whether regulators break with tradition and class the German discounters as a decent alternative for a significant number of shoppers. Unless officials fall in step with the times, and recognize the threat from Aldi and Lidl, they would have grounds to block the deal, or allow it only with punitive store disposals.

But even if the takeover does get approved, Sainsbury Chief Executive Officer Mike Coupe must then meld the two grocers together. That integration could prove a big distraction.

Shares in Sainsbury had a decent run in the wake of the merger announcement, which looked like another canny deal for Coupe. But they have suffered since.

They trade on a forward price earnings ratio of about 12.7 times, at a deserved discount to both Tesco Plc and Wm Morrison.

For the shares to rerate, Coupe must show that the service and stock availability problems that dogged the group in the summer are well and truly behind it. Though he said operations had returned to normal over the festive period, investors need to see that continue.

He also needs to secure a favorable ruling from the competition authorities, and integrate Asda without losing his focus on the competitive threat from domestic rivals and the German discounters.

That all looks a monumental set of tasks. But without completing them, Sainsbury will secure the status of supermarket sick man.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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