27th Apr 2023 13:55
(Alliance News) - J Sainsbury PLC on Thursday reported a drop in annual profit, as the grocer said it spent GBP560 million on keeping prices low for customers amid the UK cost of living crisis.
Though the move allowed Sainsbury's to maintain its place as the second-largest UK supermarket, analysts questioned how long the margin "degradation" could go on.
Sainsbury's reported that revenue in its financial year that ended March 4 rose by 5.3% to GBP31.49 billion from GBP29.90 billion a year earlier. However, pretax profit plummeted by 62% to GBP327 million from GBP854 million.
Sainsbury's explained that it has spent more than GBP560 million over the last two years to keep its prices low for UK consumers. This is GBP10 million more than the commitment first announced in December.
Victoria Scholar, head of investment at interactive investor, said that with "fiercely price competitive" rivals - discounters Aldi and Lidl - Sainsbury's had "no choice" but to keep prices low in order to preserve its market share, "rather than passing on additional cost pressures to consumers".
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said consumers were "lapping this up" from Sainsbury's.
"Sainsbury's proposition means it has little choice other than to get its hands dirty and fight with the likes of Tesco and slash prices to retain and attract customers. Its image isn't high-end enough to go the other route of pushing premium," she said.
"Attracting customers with low prices now could be the right move for the long-term as it can encourage switching from rivals. However, the degradation in margin can't go on forever and profits are already feeling the pinch.
"The huge pullback in spending in general merchandise shows the extent of consumer nerves, and the penchant for lower-priced grocery items needs to be short lived if Sainsbury's is going to be able to lift the margin ceiling it's currently enforced on itself."
Looking ahead, Sainsbury's expects to report underlying pretax profit between GBP640 million and GBP700 million in financial 2024. In financial 2023, underlying pretax profit came in at GBP690 million, down from GBP730 million a year earlier.
Chief Executive Simon Roberts said: "We really get how tough life is for so many households right now which is why we are absolutely determined to battle inflation for our customers. Our focus on value has never been greater and we have spent over GBP560 million keeping our prices low over the last two years. As a result, we are now the best value compared to our competitors that we have been in many years and we are delivering improved market share performance in Sainsbury's and Argos."
Shares in J Sainsbury were down 1.8% at 278.80 pence on Thursday afternoon in London. Over the past 12-months, the stock is up 17%.
By Heather Rydings, Alliance News senior economics reporter
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