Sainbury’s business research

3.4 Evaluation of Sainsbury’s Business Performance

Sainsburys business performance was analysed using the number of Supermarket branches and Convenience stores for the company over time from the year 2017 to 2021, see Chart 1. On the number of supermarket outlets, it was observed a growth from 605 in 2017 to 608 in 2018, after which the number stabilised until 2020 and dropped to 598 in 2021.The original growth indicates on the part of the company which agrees with the Agency Theory which makes the interests of the shareholder superior to any other interest, and in this case, it is met through company growth. Sainsburys performed well over the years opening 106 supermarkets from March 2009 to March 2018 (statista.com, 2020). The physical stores had been prioritised for that period of time and every growth opportunity translated to increase in physical stores.

The Convenience stores shows an increase from 806 in 2017 to 820 in 2019 before a decrease to 807 in 2020 and another small growth in 2021 to 813. It is therefore an indicator of able management which have the capacity to make strategic decisions which helps the company to excel both strategically and operationally. Also, a significant growth was noted with 530 new convenience stores between March 2009 to March 2019 (Statista.com, 2020). The implication is that the firm has some strengths and financially performed.

From this data, in Chart 1, it can be seen that the total number of stores decrease from 1,428 in 2019 to 1,411 as at March 2021.Transactions disclosed in the Annual Report of the company for the year 2021 show that the firm closed 11 supermarkets and opened 1 new one in 2021 to close at 598 as at March 2021. The firm also closed 9 convenience stores and opened 15 new ones in the year to close at 813 from 807. The challenges which have been experienced in the retail sector in UK in the past year have not held down the efforts of the company to grow. Its strategies and responses to operational and strategic challenges have borne fruits and the management can therefore be seen to be effective in decision making by closing stores less profitable and opening new stores during a pandemic.

Chart 1 (Statista.com, 2020) and (J Sainsbury Plc., 2021)

As indicated in (Sainsbury, 2021), the firm would be closing 25 convenience stores and 5 supermarkets before March 2022. At the same time, the management is expected to open 4 new supermarkets and 25 convenience stores. If this occurs, the firm would, by March 2022, have 597 supermarkets and 813 convenience stores which would mean the company would have a total of 1,410 stores. Though new stores are being opened and others closed, there is little change in the total number of stores recently. This shows that the firm has been taking strategic closes and openings to have their stores in more strategic areas. The expected overall effect is an increase in sales volume with little need for more physical stores. Also, the minimal decrease in stores noted can interpreted to be a gradual switch from physical to online stores which can make them have a better reach and reduced costs in rent and other related expenses. If the savings are significant, Sainsburys could improve its financial performance.

Compared to ASDA, Sainsburys is performing better. In terms of stores, Sainsburys has more than double the stores with ASDA, which has a total of 633 according to the firm store locator, with a higher concentration in North west and Yorkshire and Humber which collectively account for 180 (28.4%) of the 633 stores (Storelocator.asda.com, n.d.).

According to (Statista.com, 2021), the both companies were part of the top 10 online stores in UK as at 2019 which shows that they have been adopting and leveraging on this strategic model. However, they are ranked position 8th and 10th for Sainsburys and ASDA respectively. They fall far much behind leaders like Amazon and Tesco as shown in chart 2. Overall, there is a great market opportunity for the online stores and management of Sainsburys may have to consider strategic moves to take advantage of the opportunities in E-commerce. This can be targeted especially for those areas where they are closing stores, so that after closing, they do not close the market and lose on potential sales. In those areas where they are opening new branches, the company can be testing first through deliveries of online orders before committing substantial capital then later closing. It can be seen that it has continued to be strategic and making key moves like closing non-core stores and opening new ones, but would need to consider other strategic decisions like expanding their online reach to be more competitive.

Chart 2 (Statista.com, 2021)

 

3.5 Evaluation of Sainsbury’s financial performance

Financial performance, which shows the financial impact of all management decisions and business environment was evaluated for Sainsburys to determine the impact of the challenges the company faced as well as the impact of the responses by management. It was evaluated in terms of sales and profitability, return to shareholders, cash flow position and return on capital employed.

 

3.5.1 Retail sales

Sainsburys retail sales trend in the past years (see chart 3) had a high in the year ending in March 2018 with 9,8% increase mainly driven by inflation, the next two consecutive years show a big drop to 0.4% in March 2019 follow by -0.4% fall in the year ending in March 2020 driven by challenging market condition more particularly in the toys and gaming categories. Sainsburys result in the year ending in March 2021 shows thar retail sales were dramatically higher driven by food and Argos’ sales as well as an increase of grocery online as the result of the pandemic. Unfortunately, the growth was offset by fuel, finance services and clothing driven by low demand during several lockdowns that UK endured. Retail is Sainsbury’s core business which is a very competitive sector to operate therefore, Sainsbury must innovate constantly to increase sales and it is noted that several strategic initiatives have been put in place such as improving their food ranges as well as introducing Aldi Price Match and a well improved online capacity during the pandemic demonstrate an able team. Asda’s sales show REF a more constant growth but smaller sales than Sainsbury It can be expected due to the fact that Asda has got twice less stores than Sainsburys and a smaller online capacity. It is noted that ASDA retail sales were up by 3.1% in 2018 and fall down to -14.4% in 2019 which was a terrible year for retail (Butler, 2020).  Like Sainsburys, Asda’s sales improved by 3.6% driven by food sales and online capacity (www.retail-insight-network.com, n.d.)

 

 

Chart 3 (J Sainsbury Plc., 2021, 2020 and 2019)

3.5.2 Operating Margin

The company operating margin show some decrease in the last 2 years after a high of 3.45% in the year ending in March 2019. Initially, the measure is noted to have been low at 2.24% in the year ending in March 2018 see Chart 4. The current performance is therefore better off than earlier on despite the progressive decrease of the operating margin which can be blame on those extra costs incurred during the pandemic, Sainsburys shows efficient in controlling their operating costs, any improvement is an indication of effective operational strategies. Sainsburys can therefore be concluded to have had effective operating strategies which is the result of able management, which to them is a strength, and which can enable it to remain safe against the challenges posed by the external environment.

ASDA Group Ltd (2020, p.34) operating margin follow similar trend to Sainsburys’, had a high of 3.50% in 2018 and decrease to 2.55% in 2019 to 2.14% in 2020. Sainsburys’ performance is superior to those of Asda showing that the firm strategic and operational moves bore fruit.

Chart 4 (J Sainsbury Plc., 2021, 2020 and 2019)

 

 

 

 

3.5.3 Profit before tax

The company profit before tax had been increasing for 3 consecutive years before decreasing in two consecutive years ending in 2021, see Chart 5. Increase in profit is an indicator of good management practices, which is a strength on the part of the company. It is an indicator that the company had been making proper decisions before covid-19 struck.

Comparing Sainsburys with ASDA, information from ASDA group of companies’ accounts (Companies House)  (2020, p.2) shows a similar trend that Sainsburys, profit before tax for ASDA group was at this highest in 2018 with £804.9 million before decreasing in the next consecutive years ending in December to £556.60 in 2019 and £469.20 million in 2020. With covid-19 striking early in 2020, the company profit for the year ending in March 2020 was impacted negatively as well as the year ending with March 2021. Sainsbury was hit harder compared to ASDA group, its profit before tax decreased by 2.50% in the year ending in March 2020 and decreased again by a colossal 39.2% mainly caused by an extra cost of £485 million directly related to the pandemic (redesigning layouts in stores to keep staff and customers safe, extra bonus…) ASDA profit before tax in 2019 dropped by 30.8% mainly due to a number of one-off costs such as share option charges and property costs and it was followed by another fall in 2020 of 18.6% which can be traced to Covid-related costs as for Sainsbury, Asda had to hire extra staff to cover absences and manage increased demand and also decided to provide free of charge home deliveries for those shielding customers.            ??????

Chart 5 (J Sainsbury Plc., 2021, 2020 and 2019)

3.5.4 EBITDAR Margin

Financial analysis was further evaluated based on EBITDAR margin and was noted that, there was a general increase for 3 years before started to decrease between March 2019 to March 2021 as show in Chart 6.

The EBITDAR margin which had its high in 2018/19 to 7.56% and started to decrease in the 2 consecutive years to 7.51% in 2019/20 to end at the 12.59% dropped at 6.67% in the year ending in March 2021. Considering those years before the covid pandemic, it is evident that the firm was experiencing an improvement in performance. The magnitude of the adverse effects of covid-19 pandemic and the minimal decrease in Sainsburys EBITDAR indicate that strategic measures had been put in place to cushion the firm. This level of performance can be considered to be quite fair considering that many retailers collapsed during the pandemic. According to (Meyer, 2020), retailers like Debenhams and Arcadia group are some of the companies which did not survive. The impact came from prolonged closures as measures were undertaken to limit the spread of the pandemic.

Compared to ASDA, Sainsburys’ performance was better despite a bigger dropped in the EBITDAR Margin in the year ending in March 2021. ASDA group ltd (2020, p.20) shows that the company EBITDAR margin was at its highest in 2018 at 5.47% down to 5,17% in 2019 and decreased in 2021 by 9.3% to 4.73% in 2020.??????

Chart 6 (J Sainsbury Plc., 2021, 2020 and 2019)

 

3.5.5 Retail operating cash flow

Sainsburys’ cash flow has been improving for the last 4 years. The company operating cash flow, which is a good indicator of efficiency in the measures taken to counter the industry operational challenges increased by 2.60% between March 2019 and March 2020 followed by another increase of 15.42% from £1,971 million to £2,275 million in March 2021. The performance shows that Sainsburys’ operations were not adversely affected as they were cushioned from the industry challenges by proper operating decisions made by the firm. The trend is as shown in Chart 7, indicates that Sainsburys is less likely to be exposed to cash flow problems any time soon, considering that it even improved its operating cash flow during a pandemic. This condition is good for a company as exposure to some risks associated with minimal cash flows is minimised. (ASDA group ltd 2020, p.38) shows that the company made operating cash flows of £1,291.1 million in 2018 followed by a decrease of -₤38.7million in 2019 (essential due to the pension contributions buy-in and decrease in trade and other payables) and back to up again to ₤1,376.7 million in 2020. Comparing these cash flows to those of Sainsburys, it is clear that Sainsburys’ operating strategies are giving it an advantage to enable it to generate high cash flows from its operations.

Chart 7 (J Sainsbury Plc., 2021,2020 and 2019)

 

 

3.5.6 Retail free cash flow

In terms of total free cash flow, similar trend to that in operating cash flow is noted see Chart 8. It has been a consistent increase over time of 5.55% in the year ending in March 2019 followed by 34% in 2020 and increase again by 28.3% in March 2021 mainly driven by the working capital.This trend shows that there is an overall very positive cash flow position therefore makes the firm financially healthier and can take advantage of opportunities which arise and require cash flow such as store expansion, pay dividends, reduce its debt as well as developing new products for instance, the management decided to use up the totality to pay off dividends and reduced debt. ASDA, which has been used as a comparator, had an increase of 5.54% in 2018 with £965.4 million in free cash flow but decreased the following year to an outflow of £652.9 million, dropping by 167.6 % and ending the year 2020 with a net improvement to £1,278.9 million a 295% increased. With for exception 2019 poor result mainly due to drop in sales and a buy-in loan repayment, Asda over performed Sainsburys which endured higher capital expenditures as well as capital obligations. Sainsburys

Chart 8 (J Sainsbury Plc., 2021, 2020 and 2019)

3.5.8 Core retail CAPEX

Analysis of capital expenditures were analysed by looking at the CAPEX trend. It was noted that there was a reduction in the amount of CAPEX spending over time before increasing again in the year ending in March 2020. Consistent spending on capital expenditures indicates that the firm balance sheet continues to become stronger and therefore the net worth of the company improves, which gives Sainsburys more strength to capitalise on. As shown in chart 9, the lowest CAPEX over the latest 4 years period was ₤508 million in the year ending in March 2019 respectively which is quite high. In the pandemic period, when many other firms were collapsing, Sainsburys invested ₤568 million in capital expenditures showing the emphasis, Sainsburys puts in its balance sheet strength. Compared to ASDA, Sainsbury had more investments in CAPEX and therefore is expected to reap more from the advantages of CAPEX. According to ASDA group ltd (2020, p.3), the company had CAPEX of ₤398.4 million in 2020, up from ₤378.3 million in 2019. This shows that over time, the firm has been falling below Sainsbury commitment in CAPEX.??

Chart 9 (J Sainsbury Plc., 2021, 2020 and 2019)

3.5.8 Pre-tax ROCE

The only measure which the firm has shown some unappealing performance is the pre-tax ROCE. Over the period, the measure has shown a reduction from a high of 8.4% in 2017/18 to close at 5.5% in 2020/21, see Chart 10. This is a weakness on the side of the company and redress measures are very much needed. Though the ROCE had stabilised for 2 years at 7.4% before reducing probably due to the pandemic, more could be achieved before then regardless of the challenges experienced by the retail industry in general. Sainsburys needs to take measures to improve on the return to capital employed so as to maximise on it. Asda on the other hand demonstrates better ability to earn a return on all of the capital it employs.

Chart 10 (J Sainsbury Plc., 2021, 2020 and 2019)

 

3.5.9 Basics earnings per share

The company earning per share (see chart 11) has been alternating between increases and decreases except the last two years decreased from £0.198 in 2020 and hitting a bottom of ₤0.117 in 2021 but is excusable due to covid-19. It is a potential proble weakness as current and potential investors are not guaranteed of increasing EPS which shows stability of expected returns. However, the performance had been oscillating around the same level of ₤0.2 except for the year ending in March 2021 which is due to covid-19. It can then be concluded that the management has managed to keep the EPS at the same level regardless of the challenges it faces in the business environment. This maintenance had been brought about by the efficient strategies adopted by the firm. They include, closure of non performing stores, emphasis on online stores, focus on all stakeholders and employing more people to help and ensure that customer calls were not missed which was making them lose customers. As shown in Chart 11, the basic earnings per share hit a bottom of

Chart 11 (J Sainsbury Plc., 2021, 2020 and 2019)

 

 

3.5.10 Dividend per share

Dividends, which indicate the return shareholders get for their investment in the company, were also analysed, the Dividend per share trend can be seen in Chart 12. Dividend per share was noted to have remained relatively constant oscillating above ₤0.1. It has remained the same for the last 2 years at ₤0.106.

The trend indicates that the strategies taken by the firm have been effective and have allowed it to maintain its dividend per share over time. As expected in Agency Theory, the interests of the company shareholders are being prioritised and that is why the dividend is even being maintained even at times when economic challenges are clearly visible.

Chart 12 (J Sainsbury Plc., 2021, 2020 and 2019)

3.6 Conclusions

This study sought to explore the financial performance for a company that falls in an industry which has experienced both operational and strategic challenges. The retail industry was chosen and Sainsbury was analysed. The firm responses to operational and strategic challenges were explored as well as how they impacted the financial performances. For proper analysis, ASDA group ltd was used as a comparator to compare its performance with that of Sainsbury. Analysis of the challenges indicated that digitization of retail stores, high labour turnover and change in customer expectations are some of the challenges facing the retail market, and which Sainsbury has become exposed to. Another key one has been the Covid-19, whose effects are felt across many industries, retail sector included. Other specific operational challenges Sainsbury has had to experience is its failed acquisition attempt for ASDA, deficiency of information and integration of online and traditional marketing methods.

Study of the firm has shown that it has taken measures to counter these problems. The firm has gone online to take advantage of the opportunities of selling online and has also been closing unprofitable stores and opening new ones in strategic moves. In employee management, it was also noted that much saving had been done by reducing labour turnover. Another move taken by Sainsbury was to employ more people who ensured that customer calls never went unanswered, which meant that customer experience improved and are able to understand their changing expectations easily.

The effect of these measures were noted after doing operational and financial analysis of Sainsbury, and comparing with ASDA which is a comparator. Operational analysis was done by comparing revenues and number of stores operated by the company. It was noted that the company was operating more stores than ASDA which had only 633 stores compared to 1,411 stores by Sainsbury. In online sales, Sainsbury was ranked 8th of the best online stores in UK compared to ASDA which was ranked 10th. Sainsbury therefore performed better in the two aspects pointing to better strategic and operational decisions. The performance was evaluated in terms of return to capital employed, profit margins and cash flow position of the company. Others analysed were the firm dividend payments and investment in capital items. It was noted that, Sainsbury was better off compared to ASDA except in profit before taxes. From it, Sainsbury can learn that they need to check on how diversified their products are, and the relationship between the different products to ensure that they meet unrelated utilities.