Today I am looking at why Sainsbury’s (LSE: SBRY) could be a classic contrarian pick.
Here are two numbers that I think help make the case.
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To say that Sainsbury’s and the rest of Britain’s mid-tier grocers have their backs to the wall at present would be a huge understatement. Whacked by the march of the budget chains like Aldi and Lidl, as well as success of Marks & Spencer and Waitrose in attracting affluent customers, the fortunes of the established chains have been shaken up like never before.
At first Sainsbury’s managed to hurdle the worst of these troubles through a combination of shrewd brand and product development, such as its Taste The Difference range, as well as terrific marketing campaigns. It also managed to cannibalise the middle ground populated by the likes of Tesco, helped by the disastrous horsemeat scandal which drove shoppers screaming from the doors of its rival.
But Sainsbury’s is finally getting its comeuppance as the middle tier becomes an ever-smaller hunting ground, and the discounters improve their own product offerings and expand aggressively. Indeed, latest Kantar Worldpanel statistics showed the company’s market share slide 60 basis points in the 12 weeks to October 12, to 16.1%.
Still, a rare ray of sunshine comes in the form of surging business at its ‘Sainsbury’s Local‘ convenience stores. Revenues here are stomping higher at a rate of around 17%, and annualised sales now stand at more than £2bn.
This is viewed as a lucrative growth sector on the back of changing consumer trends, with shoppers now making more frequent trips but filling their baskets with less. This has not been lost on Sainsbury’s, which plans to open two new convenience outlets each and every week and opened 23 new outlets in the past quarter.
With Sainsbury’s nursing an increasingly-unpopular suite of out-of-town megastores, it will of course take time for success here — as well as through its online channel, where sales rose 7% during the last quarter — to compensate for dragging activity at its traditional stores. So investors will need to be patient before any turnaround can be expected.
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Equally promising is the company’s plans to muscle into the discount space itself, with Sainsbury’s having inked a deal with Danish chain Netto back in July to open 15 stores in Britain by the end of the year.
The outlets will be concentrated in the North of England, with the first outlet opening its doors in Leeds early next month and a second to be incorporated into an existing Sainsbury’s megastore in Manchester. The likes of Aldi and Lidl will of course try to nip the venture in the bud, but Sainsbury’s decision could prove a smart and fruitful counter-punch in the supermarket wars.
