Sainsbury’s chief executive Justin King today (8 May) revealed he could see the UK grocer having over 1,000 convenience stores in its estate, up from the over 520 in its network.
Speaking after Sainsbury’s reported higher annual sales and profits, King said the retailer’s convenience business was, alongside its online arm, one of the company’s “growth engines”.
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Sainsbury’s said its convenience stores, which operate under the Sainsbury’s Local banner, saw sales increase 17% in the last financial year to over GBP1.5bn. Growth came from new stores added to Sainsbury’s convenience network but the retailer insisted the Locals had also seen like-for-like sales growth.
King said Sainsbury’s convenience stores would outnumber its supermarkets in its new financial year and insisted the retailer believed it could continue to grow the estate for years.
“Our convenience store estate in numbers will overtake supermarkets sometime this year, at around the 600 mark. We are currently opening with about two a week and we see that opportunity as far forward as we can look,” King told reporters in London. “There are lots of opportunities certainly numbering north of 1,000, so we’ve got many years of development potential.”
Industry watchers have been analysing the capital expenditure plans of the major UK grocers. Last month, analysts at Shore Capital said Tesco had sought to “take one foot out of the space race” after the UK’s largest retailer said it would no proceed with developing over 100 sites and wrote down the value of some of its assets. When it announced its annual results last month, Tesco said it would focus more on its convenience and online businesses.
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By GlobalDataSainsbury’s did not write down the value of its assets. King said the retailer’s own land bank was “on our books at a value that reflects both our desire to develop and trade it and the value of trading it when we do”.
The retailer plans to develop on all of the land assets it holds, King said, subject to planning approval.
The retailer, King said, still had potential to grow its supermarket estate in the UK. He claimed Sainsbury’s had a market share of less than 5% in 35% of the country’s postcodes.
However, Sainsbury’s plans to increase the proportion of its space made up by convenience stores to reflect a change in consumer habits that had started in the teeth of the downturn and, King said, had “stuck”.
“The smaller, weekly grocery shop with shopping online and particularly convenience top-up has stuck. The changes in behaviour are not something that is day-to-day bad news for customers – cooking a bit more, eating as a family, wasting less – these are not things you are sitting at the end of the week and saying: ‘I hate the factI have to do this. I’m looking forward to going back to wasting a bit more. These are changes for all time. A new thrift,” he said.
Finance director John Rogers added the return on capital investment was higher on convenience stores. “The capital returns we can achieve on our convenience estate are broadly speaking one-and-a-half times what we can achieve on our supermarkets, so they represent an attractive opportunity to grow.”
Sainsbury’s said it will increase its “core” capital expenditure in the new financial year to GBP1.1bn from GBP1.04bn last year. King said the retailer had set a “prudent and sustainable level” of capital expenditure of 4.1% of sales, similar to last year. It plans, he added, to reduce that spend to 3.5% of sales over the medium term.
King said Sainsbury’s was still “investing in its future”. The retailer, he said, would continue to invest in areas like convenience and online.
Shore Capital analyst Clive Black said Sainsbury’s had made “a step in the right direction” with a greater proportion of its investment in “higher return convenience stores”.
However, he added Sainsbury’s could be more prudent. “We believe that Sainsbury still would benefit from a more judicious approach to its annual outlay, one followed by most of its competitors, and share in a sector wide focus on free cash flow generation and a rising tide of investor interest predicated upon improved capital discipline, noting as we do that the retailer’s net debt is growing after expansion capital expenditure and dividends,” Black said. Black noted Sainsbury’s medium-term plans for capex – 3.5% of sales – were “the same level … as Tesco”.
