2 Startling Reasons To Leave J Sainsbury plc On The Shelf

Royston Wild looks at why J Sainsbury plc (LON: SBRY) may not be a sparkling stock selection after all.

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In recent days I have looked at why I believe J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) looks set to deliver stunning shareholder gains (the original article can be viewed here).

But, of course, the world of investing is never black and white business — it take a confluence of views to make a market, and the actual stock price is the only indisputable factor therein. With this in mind I have laid out the key factors which could, in fact, send Sainsburys’ share price tumbling.

The charge of the budget brigade

The increasing success of discount retailers in the UK has been a consistent headline grabber since the onset of the financial crisis more than five years ago flattered consumer spending power in Britain. Indeed, latest Kantar Worldpanel statistics showed sales at Aldi leap a mind-boggling 33.5% during the 12 weeks to March 2, in turn creating a record market share of 4.3%.

Meanwhile revenues at fellow budget chain Lidl rose 16.6% during the period, driving its own share of the UK grocery space to 3.2%. By comparison, Sainsbury’s kept its market share stable at 17% during the period, while sales growth of 2.2% was in line with the market average.

Aggressive store expansion plans by the likes of Aldi and Lidl could threaten Sainsbury’s ability to keep sales moving in the right direction, while the planned flotation of Northern low-end retailer B&M in the next few months could also prompt further disruption in the domestic grocery market.

SBRYOnline marketplace becoming more competitive

I wrote in my last article how Sainsburys’ multi-channel approach, encompassing the white-hot convenience store and online growth sectors, looks set to drive earnings to the stars in coming years.

Ocado chief executive Tim Steiner told Reuters in recent days that he expects 40%-60% of all grocery sales in developed markets to be executed online in the future, up from 5% in Britain currently.

Sainsbury’s has punched great success in expanding its online business, and which is now accelerating at double-digit pace. But intensifying competition, as new entrants hit the market and online operators like Tesco bolster their existing service, could hinder future growth rates.

Morrisons launched its own internet store in January after a much-publicised tie-up with Ocado last year, while Amazon has boosted its own grocery range just this month by agreeing to sell hundreds of Mexican food specialist Mexgrocer.co.uk’s products through its website. And the American company is considering bringing its Amazon Fresh delivery service to the UK in the near future.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares in Tesco and has recommended shares in Morrisons.

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