Sainsbury’s position “vulnerable”
Sainsbury’s is strategically vulnerable to a price war with Tesco, according to a leading duo of City analysts.
David McCarthy and Andrew Porteous of Evolution Securities said that although Sainsbury’s was outperforming the industry, its negative free cash-flow, weak balance sheet and low operating margin made its position particularly vulnerable to competitor aggression.
“Sainsbury’s future is dependent on Tesco’s strategy and it would be rational for Tesco to attack Sainsbury’s,” they said. “The longer it is left to prosper, the harder it will be to hurt and the more expensive it will become.
“If Tesco invested one year’s profit growth into price, it could wipe out around two-thirds of Sainsbury’s profits, thereby decimating Sainsbury’s cash-flow and returns on new stores.”
Sainsbury’s disappointing fourth-quarter sales results also highlighted unprecedented problems across the sector, with rising capacity increasing customer loyalty at the expense of shrinking basket sizes and total spend.
“The market and retailers are waking up to the destructive dynamics of excess capacity additions, declining disposable incomes and rising cost inflation,” they said.
“Sainsbury’s will have to work hard through next year to offset cost increases, driven by higher food inflation, inflation-linked debt, inflation-linked rents and higher energy costs.”