When Mike Coupe took over from his showier former boss Justin King as Sainsbury’s chief executive in 2014, just as the group’s nine year-long stretch of sales growth was coming to an end, many industry observers believed he had been handed one of the biggest turkeys in the business.
The rise of discounters Aldi and Lidl forced all of the big four grocers, including Sainsbury’s, to slash profits to fund price cuts just as they had to close stores which were surplus to requirements thanks to the rise of online shopping.
However, two-and-a-half years on, despite a slight drift down in market share, Sainsbury’s has more or less held its own helping it to steal back its position as the UK’s second largest grocer from a shrinking Asda. Coupe reckons it is now the discounters on the back foot. “They are under pressure and it’s more challenging for them,” Coupe says.
He says the major chains have all narrowed the price gap with Aldi and Lidl in the past year and, even where the gap hasn’t closed, the discounters have been forced to compress their already slim profit margins to maintain their price lead.
Sainsbury’s has already spent more than £150m on cutting prices in the past two years.
The Christmas meal has proved a significant battleground: last year, Tesco stole a march on the discounters with cheap seasonal veg and this year Sainsbury’s claims it has the cheapest turkeys on the market at £3.50 a kg.
Sainsbury’s is also investing in developing product areas where it believes it can differentiate itself from the discounters such as ready meals, prepared fruit or the fast growing gluten and dairy free foods.
It has already revamped 3,000 food products, a move which it also hopes will help it fight back against the expansion of Waitrose and Marks & Spencer, which has impinged on Sainsbury’s comfortable position as the handiest place to buy quality food. This year, 25% of its Christmas products are new and hundreds more items will be revamped next year.
Sainsbury’s has already spent £60m on improving the quality of its products including £9m on its takeaway food ranges. Introducing options such as porridge and cold pressed juices and improving basics by, for example, using tomatoes that will not make its sandwiches soggy, has helped to boost sales.
Coupe says the strategy is working but it’s still tough. “We have seen a significant refocusing of the mainstream supermarkets on the discounters and that’s undoubtedly dampened their growth. But they are still growing because they are opening lots of shops and the threat isn’t going to go away,” he says.
Some argue that, given the tough environment, Coupe should be focusing on the food business, but he believes the future is in branching out.
Coupe, who after stints at nearly every major grocer was seen as a safe pair of hands after the showmanship of King, has proved to be even more ambitious and bold than his predecessor.
Always more interested in online retailing than King, Coupe has invested £1.4bn in buying Argos, the catalogue shop which makes half of its sales online and specialises in high speed deliveries.
“I believe there is a significant opportunity in clothing and general merchandise. That market is unconsolidated and where we have relatively small market share and an opportunity for financial services,” he says.
Coupe’s strategy hinges on the three divisions of Sainsbury’s – its supermarkets, bank and Argos, all cross selling their goods and services to each other’s client base while reducing central costs.
“It’s the three businesses together that gives the group more flexibility, more resources and more ability to compete,” he says.
After an “operationally successful” Black Friday last month, the biggest sales day of the year for Argos, Coupe says he is more confident than ever about the buyout.
About 250 Argos outlets will open in Sainsbury’s supermarkets as part of an aim to build destination stores where, along with coffee shops, clothing areas, groceries and other services, they will tempt shoppers away from their computers. The Sainsbury’s Argos stores will be cheaper to operate than those on the high street where analysts believe at least 100 will close.
A planned £160m of synergies from the merger will feed through to the group’s bottom line as promised to the City but Coupe hints there are likely to be further financial benefits to play with.
“If we can generate benefits above £160m, Sainsbury’s and Argos have options on what we do with that and one of those is price and another is quality or more profitability. All of those are possible and the key thing is to have the options.”
Coupe has promised that the combined business will grow its profit margins from 2.5% to as much as 3.5% over the next few years, clawing back the margin lost during the rise of the discounters.
But some analysts argue that the Argos acquisition has only exposed Sainsbury’s to more risk and inflationary cost pressures. It sources more goods, such as electrical appliances, priced in dollars from the far east – which could only increase the pain from potential cost increases caused by the 15% fall in the value of the pound since the Brexit vote.
However, Coupe says the bigger group will be more capable of withstanding competitive pressures.
It is not just about saving money. In the 10 Sainsbury’s stores where Argos has already opened outlets, grocery sales have been boosted by 1% to 2% while sales the catalogue outlets are seeing growth of more than 20% a year after they opened.
Part of the logic for the buyout of Argos is to access its quick delivery service which Sainsbury’s hopes to capitalise on to sell more of its clothing and homewares and, perhaps one day, groceries.
Coupe says the tie-up with Argos makes Sainsbury’s better equipped for the future with the likes of Amazon ploughing into the UK grocery market and online food shopping expected to rise 68% over the next five years, according to the IGD industry body.
The smartphone has swiftly become the preferred tool for internet shoppers and Coupe says he expects the pace of change to be even more rapid over the next five years as new technologies and ways of shopping emerge.
“The building blocks are in place. Our job is to make stuff happen as we said it would.”
• This article was amended on 22 December 2016 to correct the price of Sainsbury’s turkeys.
