The chief executive of Sainsbury’s has warned major suppliers that they should be taking the hit on any cost increases resulting from the falling value of the pound, rather than trying to pass on price rises to retailers and shoppers.
Mike Coupe fought back against widely reported price rise demands from large grocery brand owners, such as Unilever – the owner of Marmite – Birds Eye and Pepsico, which owns Walkers Crisps, saying these international groups were more profitable than the retailers they supplied. “I would encourage them to mitigate cost pressures they might feel through their supply chain,” he said.
The impact on prices of the sharp drop in the value of the pound since the Brexit vote was still uncertain, Coupe said, as Sainsbury’s reported a fall in first-half profits for the third year in a row.
Underlying pre-tax profit fell 10% to £277m and the supermarket cut its interim dividend to 3.6p a share from 4p a year earlier against a backdrop of what Coupe said were “challenging market conditions”.
Sales in stores open for more than a year fell 1%, although total group sales increased 1.8% to £12.6bn in the 28 weeks to 24 September, helped by growth online, the opening of 16 new convenience stores and a 1% rise in clothing sales and growth at its newly acquired Argos chain.
Coupe warned that, excluding the contribution from Argos, Sainsbury’s profits for the second half of its financial year would be even lower than the first because of price cuts and cost inflation, partly resulting from wage rises for shopfloor staff.
Profits and sales for all the main supermarket chains have fallen in the face of rising competition from discounters Aldi and Lidl, which has forced a wave of price cuts across the market. Now suppliers are demanding increased payment for their goods because of cost increases resulting from a 15% fall in the value of the pound against the dollar and the euro.
Shares fell more than 6% on Wednesday, making Sainsbury’s the FTSE 100’s biggest faller, as the company revealed that profit margins remained under pressure after dipping 0.24 percentage points to 2.47% in the half year.
There was also concern about a £674m leap in the value of Sainsbury’s pension deficit to £1.06bn, although the company said this figure was largely down to timing, and was already as much as £400m lower.
Coupe said the full impact of the devaluation of sterling on shopfloor prices was “as yet uncertain” and “difficult to predict”.
Referring to the election of Donald Trump as US president, Coupe said: “As we see from events this morning we are living in unprecedented times. With currency fluctuations and commodity price differences, [pricing on various products] will play out in different ways.”
Over the three months to 24 September, Sainsbury’s grocery prices fell 1%, about the same level as the previous quarter. Coupe said the main sign of inflation so far was on petrol, which has risen by 5p a litre or 4.5% to £1.15. “Apart from that, there is no sure sign of any significant changes,” Coupe said.
He said about half of Sainsbury’s food was imported, and therefore subject to cost inflation related to the fall in the value of the pound, and the retail chain already sourced about as much UK product as it possibly could. But he said the retailer was already looking at alternative sources of supply in order to offset cost rises.
“Our job is to do everything we can in the supply chain to mitigate those cost price rises for our customers,” Coupe said.
The UK’s second biggest supermarket group completed a £1.4bn takeover of Home Retail Group, which owns Argos, in September. Sainsbury’s has opened 22 Argos digital stores in its supermarkets and plans to have 30 in place by Christmas. Its purchase of Home Retail was part of a push to sell a broader range of products in an increasingly competitive grocery market.
It wants to have 250 Argos stores in Sainsbury’s outlets in three years’ time, although Coupe would not say how many of those will be replacements for high street catalogue shops. Of the 28 that will be open in Sainsbury’s by Christmas two will be replacements – Oldham and Plymouth.
Sainsbury’s also plans to open three more supermarkets and more than 20 convenience stores despite the difficulties in the grocery market.
The retailer said it was on track to deliver £500m of cost reductions by the end of 2017-18, and had also identified another £500m of cost savings that could be realised over three years from 2018.
Consumers are likely to face rising food prices in the coming months if supermarkets start to pass on the higher cost of imported goods to customers. Last month, Tesco became embroiled in a row with the supplier Unilever after the maker of brands including Marmite and Persil demanded an across-the-board 10% rise in prices in light of the devaluation of the pound.
