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How J Sainsbury plc Makes Money

We all have a broad idea of what the companies in our portfolios do. But how much do you really know about their products and their markets, or how much each of their activities contributes to the bottom line? Understanding how a company makes its money can help you decide whether it’s a good investment.

Sainsbury’s (LSE: SBRY) (NASDAQOTH: JSAIY.US) formal segmental analysis is near-to-useless. It reports three segments: Retailing, Financial and Property. The latter two segments cover property ventures with the UK’s two biggest REITs and Sainsbury’s Bank, a joint-venture which the supermarket will fully buy out from Lloyds Banking. However, the contribution of both segments is trivial.

So investors are at the mercy of the snippets of more meaningful information the company reveals about the breakdown of its results between food and general merchandise, and between the distribution channels of traditional supermarkets, and faster-growing convenience stores and online.

Core business

Overwhelmingly, selling food in traditional supermarkets is where Sainsbury’s makes money. Out of total revenues of £25bn last year, just £1.5bn came from convenience stores and £1bn online. Non-food sales were just over £1bn. That core business is also what Sainsbury has proved to be good at, with a long track-record of rising quarterly sales and a market share of UK groceries that has risen to around 17%.

Competition is based on price, quality and convenience. Sainsbury’s is particularly strong on own-brand goods, which compete well on value (i.e. price plus quality). It also has a strong emphasis on fresh fruit and vegetable and on UK-sourced foods, though it isn’t involved in food production like smaller rival William Morrison.

Convenience

Sainsbury’s is adding two new convenience stores a week, and plans to have as many of those as its 600 supermarkets by next year, but they still only represent about 5% of selling space. Convenience store sales are growing at over 15% a year compared to under 5% for total revenues. The company also see growth from locating traditional stores to serve the fifth of the population more than 15 minutes drive from away.

Geographically, the chain operates solely in the UK. Apart from Tesco, it’s the only supermarket with a bank, but it’s less adventurous in moving into new fields. It offers mobile telephones (another joint venture, with Vodafone), energy re-selling, digital entertainment downloads and pharmacies.

Sainsbury’s adds about 10% to its profits by realising the value in its real estate through sale and leasebacks. Over the last five years it has made £340m profits by selling £1.3bn of properties. With over £11bn-worth of properties still on its books at £8bn there could be a few more years of that to come.

Dividends

Sainsbury's rewards its shareholders with a 4.6% yield, well above the market average. Building a diversified portfolio of dividend-paying shares is one of the best ways of growing your portfolio. If you'd like to learn more about how dividends can make you wealthy, I recommend you take a look at 'My Five Golden Rules for Building a Dividend Portfolio'. It's a brand new report from the Motley Fool.  Just click here to download it -- it's free.

 > Tony owns shares in Tesco and Vodafone but no other stocks mentioned in this article. The Motley Fool owns shares in Tesco.