J Sainsbury (LSE: SBRY) has fallen to earth with quite a bang this week. Its radical plan to transform the trading landscape through a ‘super-merger’ with Asda is seemingly in tatters after the Competition and Markets Authority suggested it would throw out the planned tie-up as it would be bad for consumers. Suggesting that an alliance could lead to “higher prices, reduced quality and choice, and a poorer overall shopping experience,” Sainsbury’s may be forced to go back to the drawing board to rescue its failing food operations.
The scale of the setback was underlined by the sharp sell-off of Sainsbury’s stock in the wake of the news. The supermarket’s share price collapsed to its cheapest for almost a year as people scratched their heads as to what other steps it can take to reinvigorate its declining stature with British shoppers.
A big disappointment
Chief executive Mike Coupe certainly has been pulling out all the stops to supercharge revenues at Sainsbury’s. A direct attack on Aldi and Lidl in 2014 with the relaunch of Danish discount chain Netto in northern England proved a false start and was binned after just two years.
Its takeover of Argos in 2016 has proved far more successful, and the decision to branch out and reduce its reliance on the ultra-competitive grocery sector proved a wise one as it’s helped sales at Sainsbury’s to avoid falling off a cliff completely.
That said, the takeover ultimately isn’t a silver bullet considering the supermarket’s still heavily reliant on food to drive the bottom line. And more recently, signs have emerged that Argos too is beginning to creak as the stalling UK economy weighs on broader shopper spending power. The catalogue division may have outperformed what has been described as “a weak general merchandise market”in the 15 weeks to January 5, but Sainsbury’s declared that sales here were still hit by “a combination of cautious customer spending and our decision to reduce promotional activity across Black Friday.”
General merchandise sales at Sainsbury’s, including those at Argos, therefore dropped 2.3% in the last quarter, and with its food division still failing to fire, total like-for-like sales (excluding fuel) at the FTSE 100 firm fell 1.1% from a year earlier.
Saviour no more?
The planned tie-up with Asda isn’t quite dead but it looks increasingly like Mr Coupe will be required to look elsewhere to transform his flagging company. In an environment where tough economic conditions are forcing more and more customers into the arms of the German discounters, and these firms are frantically expanding to capitalise on this, he will need to pull another rabbit from his hat extremely quickly.
Sainsbury’s shares look cheap and carry a chubby dividend yield of 4.2%, but the fragmentation of the British supermarket space is sprinting ahead and that’s the reason I, for one, won’t be touching the struggling supermarket with a bargepole.
