Sainsbury’s Shrink To Survive

Photo: Sainsbury's

Sainsbury’s Shrink To Survive

If you're one of our UK-based readers, you'll need no introduction to the Sainsbury's brand name. To British shoppers, it's as familiar as Walmart is to Americans, and sells largely the same goods. It's a supermarket - the type of place you can go to for all of your groceries for a week, and pick up some clothes and household appliances at the same time - and it's been a familiar name on the UK's high streets since 1869. Some of those high streets will soon find that their local Sainsbury's has vanished.

Earlier this week, the company announced that it’s to close own fifteen of its full-sized supermarkets within the country, along with a further forty of its smaller convenience stores. For some smaller towns and villages, the move will represent a complete withdrawal of the brand from the area. That’s good news for large rival brands such as Tesco, Asda, and Morrison’s, but bad news for loyal customers who have been doing their shopping at the same place - or with the same brand - for decades.

As well as closing down stores which bear the Sainsbury’s name, it will also be closing 70 of its Argos catalog stores. Argos was once an independent chain of stores with an enormous presence in Britain, but ran into serious financial difficulties back in 2016. At the time, Sainsbury’s parted with big money to buy the Argos brand and take it under the Sainsbury’s umbrella, but it would appear that the company may now regret that move. Many standalone Argos stores were closed when the takeover was completed; the closure of a further 70 all-but eliminates the presence of Argos from British streets. Sainsbury’s have said that the company will still have a visible presence, but it will be within Sainsbury’s supermarkets rather than operating from dedicated premises.

The sweeping changes announced by the company don’t just stop there. For a little over three years, Sainsbury’s has been operating as a bank as well as a retail store. Sainsbury’s customers seeking loans, credit cards, and mortgages have been able to apply for and obtain them directly from Sainsbury’s. As per the announcement we referenced earlier on, this will not be the case in the future. Home loans are no longer being offered with immediate effect, and the Sainsbury’s bank will be gradually de-funded from the beginning of 2020. This move is less of a surprise; Tesco also recently announced that it’s withdrawing from the mortgage market. Mortgage sales have been slowing in the UK for some time, and there’s no longer a need for Sainsbury’s to compete in a market that its main rival is no longer active in.

Who Loses Out?

Worryingly for those who work in Sainsbury's, or have a job which relies on supplying their stores, there isn't yet total clarity on which stores will be closed down. The announcement from the company's head office all-but-confirmed some job losses will be inevitable, and that the moves were part of a strategy to improve the financial fortunes of the firm. Sales are down year on year compared to 2018 - and 2018's sales were lower than 2017's. The company has stated an intention to make £500m of savings within the next five years, and also hopes to pay down £750m of corporate debt. As much of the costs of running the company are tied up in overheads, stores are the most logical overheads to do away with.

Questionable Acquisition?

With all this information about the company’s debt and profit situation now publicly available, the decision to acquire Argos in 2016 looks more questionable than ever. The company’s dated business model thrived during the 1980s and 1990s, but looks archaic in the 21st century. Argos is a catalog firm, but one which generally relies on customers coming in-store to collect their purchases. The existence of the stores allows for walk-in trade, but in an era where customers are used to being able to order the same goods from Amazon and have them delivered next day (or even same day), the need for companies like Argos is unclear.

This issue is, of course, not limited to the retail sector, and nor is it specific to catalog companies. Any company which relies on selling something which can easily be found online is having to rethink its business strategies. Casinos have been under pressure ever since the first casino website was built. Why walk all the way to a casino when you can play mobile slots from the comfort of your own home? Why put money into a real slots game when you get a lower house edge playing mobile slots on website like Rose Slots Online? Amazon and companies like it are the equivalent of mobile slots for companies like Argos - a faster, more dynamic, and often more economically efficient way for consumers to get access to the things they like.

Given the company’s struggles elsewhere, it’s perhaps ironic that the few positive elements of the announcement relate to the online side of Sainsbury’s business. Online growth has been good, with a steady upswing in the number of customers ordering home deliveries of groceries. Their specialist clothing brand Tu - which also does impressive sales numbers on the internet - has been gaining in market share at the same time. Like many companies before it, Sainsbury’s may finally be getting the message that less is more when it comes to having a physical outlet, and that customers who buy from you offline are usually happy to come and find you online, too.

The bottom line of the announcement is that pretax profits for the first six months of 2019 have come in £50m below guidance for the company, which won’t be pleasing news for investors, but isn’t disastrous. Mike Coupe, the company’s chief executive, maintains that the change in strategy indicated by the announcement will ensure that the end-of-year targets will still be met. Sainsbury’s may therefore still have a prosperous future ahead of it, but it will be a leaner and meaner corporate machine.