Why J Sainsbury plc Outshines Its Big-Supermarket Peers

“These doughnuts don’t taste as nice as the ones I get from Sainsbury’s,” lamented my friend, recently.

At this point, I should own up to enjoying the sugary, fatty, jammy treat myself, but these rivals to my friend’s usual Sainsbury-branded doughnuts were not up to scratch in his experience and opinion.

Leading with quality

That anecdotal tale underlines the great advantage that J Sainsbury (LSE: SBRY) has over peers such as Tesco, WM Morrison Supermarkets and Asda when it comes to fighting back against the disruptive threat from hard-discounting challengers Aldi and Lidl. The one thing that Sainsbury’s does have that causes the grocery chain to outshine the others is a bedded-in reputation for quality. That’s half a match for the hard-discounters, already in place.

Aldi and Lidl use a secret weapon to win battles for market share in Britain, it’s called ‘amazing good quality’. Most think of low prices when considering the hard-discounters, but that would never work alone. Success comes from a relentless pursuit of quality. Many of the goods we buy from Aldi and Lidl trounce the mainstream supermarkets’ offerings by being twice as good. So, the winning formula is: 

great quality + cheap = spectacular good value

When we look at that equation, Sainsbury’s arguably has the ‘great quality’ side in place and now needs to work on the ‘cheap’ side if it is to compete head-on with the threat from the hard-discounting grocery model. From its current position, though, Sainsbury’s looks to be the strongest team in the ranks of the old guard.

Changing the business model

I’m certain that Aldi and Lidl, and potentially others, will continue to disrupt the traditional supermarkets’ businesses in Britain over the coming years. Sainsbury’s, Tesco, Morrisons and Asda will need to adapt their business models to compete, moving at least some way towards the hard-discounting model. We can’t ignore the likes of Aldi and Lidl. Around 50% of British households shopped at one or the other of these German-owned discounters over the Christmas period, says researchers Kantar Worldpanel.

We don’t find shopping in the hard-discounting stores unpalatable at all; the honest approach is refreshing, the absence of tricky-dickey wheeler-dealer offers is liberating, the speed of service life enhancing, the non-reliance on time-consuming vouchers and loyalty cards a cause for celebration and joy!  

To survive and thrive, I reckon, Sainsbury’s and the other traditional supermarket chains need to focus operations. A narrow focus is a time-tested method for all types of business to find success and prosperity. Rarely does the all-things-to-everyone approach deliver decent profits.

Still slipping

Sainsbury’s recent fourth-quarter results show like-for-like sales continuing their slide. Some of that’s a consequence of the current supermarket price war. However, it’s easy to imagine further market share losses to the hard-discounters if things don’t radically change. Those operators sitting around waiting for the market to ‘normalise’ will be in great danger. The old way of doing business is gone forever for the supermarkets, and we need to look to Aldi and Lidl to see which direction to move in.  

The essence of the hard-discounting business model is a limited choice of products, more private label offerings of fantastic good quality, a high quality to price ratio — high quality at low prices, and efficient operations. Sainsbury’s has a lot still to do to compete, but at least the firm enjoys a ‘quality’ head start.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.