British grocery giant Sainsbury’s (LSE: SBRY) lit the blue-touch paper in recent days by hinting that it plans to aggressively ramp-up its exposure to the lucrative convenience store sector.
Speaking to The Mirror, supermarket chief executive Mike Coupe said that “we are currently at just over 700 convenience stores and we’re opening roughly one to two a week,” adding “at that rate you can easily get to well over 1,000 and, within the realms of possibility, 1,500.”
Coupe sung the praises of the performance of its smaller outlets, and hinted that there is much more to come. In its last trading update the London firm advised that “the trend of more frequent and local shopping continues,” a phenomenon which powered sales at its Sainsbury’s Local stores 16% higher during October-December.
But can convenience stores REALLY turn the tide?
Along with online shopping, there is no doubt that the convenience sub-sector represents a rare chink of light for the country’s beleaguered, established chains like Tesco (LSE: TSCO) and Morrisons (LSE: MRW).
However, investors should not be under the illusion that Sainsbury’s expansion initiative is a magic wand to turn around its ailing performance at the checkout. Tesco announced in January that of the 43 stores that it plans to shutter in the coming months, 70% of these comprise of its Express and Metro frontages. And Morrisons said this month that it would close 23 of its underperforming M Local stores in the near future.
With revenues continuing to struggle at their traditional megastores, Britain’s major chains have been throwing the kitchen sink at the convenience space to resurrect their growth prospects.
This is inevitably leading to industry cannibalisation as Sainsbury’s et al battle for the same clientele, customers who are also being led astray by budget chains like Aldi as well as premium outlets such as Waitrose. Indeed, Aldi saw sales surge an impressive 19.3% during the 12 weeks to March 1.
Against this challenging backdrop Sainsbury’s is anticipated to follow up an anticipated 23% earnings decline in the year concluding March 2015 with an extra 14% slide in the new fiscal year, according to City analysts. Given the scale of hard work the supermarket has to carry out to get back on the road to earnings growth, I reckon that Sainsbury’s is set to remain unattractive stock pick for some time to come.
