REG - Sainsbury(J) PLC - Sainsbury’s Strategy Update

J SainsburyAnnouncement

07/02/2024 07:00

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RNS Number : 2508C  Sainsbury(J) PLC  07 February 2024

7 February 2024

 

 

Sainsbury's Strategy Update

 

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

 

"Next Level Sainsbury's" strategy to build on momentum and deliver enhanced
returns for shareholders

 

Key Highlights

 

Our "Next Level Sainsbury's" strategy builds on the success of the Food First
strategy we launched in November 2020. This put food back at the heart of
Sainsbury's, reset our competitive position and has created a strong financial
platform from which we will grow, invest in further strengthening the business
and deliver enhanced returns to shareholders. Our "Next Level Sainsbury's"
strategy will:

 

 •    Deliver further grocery market volume share gains by bringing more of
      Sainsbury's food range to more customers, becoming the first choice for food
      for more people, continuing to attract more bigger basket primary shoppers
 •    Continue to build a world-leading Nectar loyalty platform offering
      personalised, rewarding and integrated loyalty and market-leading retail media
      capabilities
 •    Build on Argos's strengths in convenience and value, growing frequency and
      spend through improved range and relevance while also delivering further
      operating model efficiencies
 •    Invest in our capabilities across technology and infrastructure and deliver
      another £1 billion of structural cost reduction, underpinning these
      objectives and driving growth and efficiencies

 

Our Commitments

 

We are making eight commitments that the strategy will deliver by March 2027:

 

 ·      Food volume growth ahead of the market           ·      Deliver profit leverage from sales growth
 ·      Customer satisfaction higher FY27 vs FY24        ·      £1bn of cost savings over three years to FY27
 ·      Colleague engagement higher FY27 vs FY24         ·      £1.6bn+ retail free cash flow over three years to FY27
 ·      Deliver our Plan for Better commitments          ·      Higher return on capital employed

 

Profit and free cash flow guidance

 

 •    Consistent with our commitment to deliver profit leverage from sales growth,
      we expect retail operating profit growth from the start of the plan
 •    Capital expenditure will increase to between £800 million and £850 million
      per year over the next three years and we will make an additional £70 million
      investment in FY 2024/25 in our Smart Charge Electric Vehicle (EV) charging
      network
 •    Targeted incremental capital expenditure will be focused on high returning
      efficiency and growth investments
 •    We continue to forecast retail free cash flow of at least £500 million per
      year and now forecast at least £1.6 billion over the next three years. We
      expect cash flow to increase over the period as profits grow, in part
      replacing the role of working capital benefits in earlier years. We expect
      one-off cash costs associated with cost saving programmes to be around £150
      million over the course of the three years

 

Enhanced Returns for Shareholders - Progressive dividend commitment and share
buyback

 

The strength of our balance sheet and cash generation will allow us to invest
capital in targeted areas, further strengthening our capabilities, driving
growth and efficiency and generating higher profits and returns. A higher
level of capital investment is balanced with a reinforced commitment to strong
free cash flow generation and stronger returns for shareholders.

 

Specifically, we will now commit to a progressive dividend policy from the
start of next financial year and the commencement of a share buyback
programme, with £200 million of share capital to be bought back over the
course of the next financial year.

 

Simon Roberts, Chief Executive of J Sainsbury plc, said:

 

"Our Food First strategy has delivered on its promise over the last three
years, making Sainsbury's a stronger business with a much sharper position on
value and a major refocus on our innovation. Customers have recognised the
progress we've made, as our market share gains have shown.

 

"Our Next Level Sainsbury's strategy is about giving customers more of what
they come to Sainsbury's for - outstanding value, unbeatable quality food and
great service. Thanks to our scale, our brand and our people, we are in a
unique position to deliver for customers across Sainsburys, Argos and Nectar.

 

"We're going to build on what's driven our success since 2020. We're
determined to be First Choice for Food, ensuring more customers in more of our
stores can enjoy more brilliant Sainsbury's food. That means more space for
our food offer, while still delivering the general merchandise products
customers want from us. That way, not only will we find more ways to delight
new and existing customers, we will also continue growing volume market share.

 

"While I'm proud of the progress we've made to date, we're only just at the
beginning of rediscovering quite what this business is capable of. By taking
Sainsbury's to the next level, delivering for customers and colleagues, we
will also deliver enhanced returns for shareholders through a share buyback
and committing to a progressive dividend."

 

We make good food joyful, accessible and affordable for everyone, every day

 

With an updated purpose, our Next Level Sainsbury's strategy focuses on four
key outcomes:

 

·      First choice for food

·      Loyalty everyone loves

·      More Argos, more often

·      Save and invest to win

 

First choice for food: Attract many more people to choose Sainsbury's as the
place they come to for good food - and play a leading role in creating a
sustainable food system in the UK

 

·      More food choice for more customers

·      Consistent value, every day

·      The leader in freshness, availability and innovation

·      A complementary range of relevant products and services

·      A more resilient UK food system

 

More customers are doing more of their grocery shopping at Sainsbury's(1),
increasingly recognising the value that we deliver while continuing to choose
us for range, quality and service(2). This is reflected in growing numbers of
bigger basket primary shoppers(1) - customers who do their main shop at
Sainsbury's. We will continue to offer consistently great value to customers
and expect further progress as customer price perceptions continue to catch up
with the significant change in price reality.

 

We are proud of our food range. Our strengths in fresh food, range and
innovation are at the heart of Sainsbury's heritage and brand promise, Good
Food For All Of Us. However, we currently do not offer our full range to
enough customers in enough locations, with only 15% of our supermarkets
offering the full food range and some of our highest potential stores not
stocking the grocery range that customers expect of Sainsbury's. This also
impacts online range and perceptions of availability as our online grocery
orders are picked from stores.

 

We will invest to bring more of our range to more customers, particularly
enhancing choice in fresh food. We will focus on around 180 of these highest
potential stores over the next three years and we expect this unique
opportunity to be a key driver of grocery volume gains. We will create more
space for food in many locations by reallocating some space currently occupied
by general merchandise and clothing.

 

We will tighten the focus of our general merchandise and clothing ranges in
stores, aligning them more closely to customers' grocery shopping missions and
ensuring ranges are relevant and irresistible at the right moments. In
Sainsbury's, only half of our primary customers buy our general merchandise
and clothing products, representing a significant opportunity, particularly as
we grow our numbers of primary shoppers. In combination with higher profit
densities from food, this will generate significantly better sales and profit
returns on store space.

 

We expect to open around 75 new Sainsbury's Local convenience stores over the
next three years and also have a significant space rebalancing opportunity to
allocate more space to food on the move ranges, the primary mission of most
customer visits.

 

We will build further on the strength of our supermarket locations and
customer traffic, investing further in our Smart Charge ultra-rapid EV
charging network to increase our network of reliable ultra-rapid charging bays
to more than 100 stores by the end of FY 2024/25.

 

We will invest in our capabilities, driving improved productivity and freeing
up more colleague time to deliver great customer service, building on customer
service satisfaction scores that are already significantly ahead of our
competitors.

 

Sainsbury's has been at the heart of the UK's relationship with food for more
than 150 years, driving progress across innovation, sustainability and
welfare. This brand heritage and our strong, long-term relationships with
suppliers put us in a strong position to play a leading role in creating a
resilient and sustainable food system in the UK, including through our Plan
for Better commitments.

 

Loyalty everyone loves: Build a world-leading loyalty platform - more
personalised, joyful, rewarding and transparent - for everyone

 

·      Personalised, rewarding and integrated loyalty

·      Joy and connection beyond transactions

·      World-leading Nectar360 capabilities

·      Strong coalition of partners

·      Always transparent use of data

 

Nectar has delivered ahead of our plan and is playing an ever-larger role for
customers and within our business. The launch of Nectar Prices has transformed
Nectar sales participation, customer recognition of the value that Nectar
provides and value perception more widely, with customers saving an average of
£12 off a weekly £80 shop by shopping our Nectar Prices. We now have more
than 16 million digital subscribers and will invest further in the Nectar app,
continuing to build engagement with the Nectar proposition and driving greater
loyalty.

 

Nectar's personalised offers, including Your Nectar Prices, are world-leading
in their scale, generating over 260 million different personalised offers each
week. More than one million customers shop using Your Nectar prices every
week. Your Nectar Prices is currently available to online and SmartShop
customers and we will roll this out more widely. We will further invest in the
integration of Nectar across all of our digital platforms and into payment
solutions and we will continue to build our coalition of strong partners like
British Airways and Esso. This will build stronger digital engagement and
deliver even more value to Nectar customers.

 

Nectar360 operates the Nectar coalition and manages Sainsbury's and Argos
retail media services, using its own insights and media expertise to connect
the UK's biggest brands with customers. Nectar360 is well positioned within
the fast-growing UK retail media market, with scaled first party data and deep
media capabilities. Nectar360 serves over 870 clients directly and has built
partnerships with the key agency groups. It has a strong track record of
delivering returns on their advertising spend. We are investing in high return
growth by expanding our team and unifying our capabilities across instore,
onsite and offsite.

 

We are now forecasting an incremental £100 million of Nectar360 profit
contribution over the three years to March 2027 (previous guidance was £90
million over the four years to March 2026).

 

More Argos, more often: Unleash and transform Argos around the three things
that have always made it brilliant - curated range, famously convenient
experience and great value - so more customers buy more complete baskets more
often

 

·      Famous for convenience

·      Inspiring choice, always great value

·      Supercharged digital capabilities

·      Accessible and relevant credit, care and services

·      Next level service, efficiency and stock flow

 

Argos has a structurally advantaged low cost-to-serve operating model, backed
by the scale of being part of the UK's second biggest general merchandise
retailer(3) and delivering a Click and Collect and delivery proposition
unmatched by any other general merchandise retailer in the UK. We have further
transformed this model in recent years, reducing fixed costs by more than 300
basis points of sales by reducing the standalone store estate and opening more
Argos stores inside Sainsbury's. We have made significant changes to how and
where we move and hold stock, driving efficiency but also improving
availability by making sure we have the right stock closer to customers at the
right time.

 

We have further to go in terms of Argos store estate changes and we will also
further refine the store operating model, with clustered stores replacing a
one-size-fits-all approach. This better recognises the significant variation
in Argos store size and role. Early trials suggest significant cost to serve
reductions alongside improved customer satisfaction as a consequence of better
tailored ranges and service. We also expect end-to-end productivity programmes
to drive significant improvements in working capital, availability and supply
chain efficiency.

 

Customers love and recognise Argos for the convenience and consistently great
value we provide and this will remain at the heart of the Argos proposition.
Half of UK households shop at Argos every year and we have the third most
visited online retail website in the UK(4). More than 70% of sales start
online, 70% of sales are collected in store and nearly 70% of online Click and
Collect orders are available for immediate collection. However, customers
visit Argos on average only three times per year and we believe we have
significant opportunity through increasing awareness of the Argos service
proposition, and increasing frequency of visit and basket spend.

 

We will extend range in selective areas and enter some new product categories,
often through supplier-direct fulfilment, where we will sell more third party
products through a stockless operating model. We will invest further in our
website, app and customer relationship management capabilities to elevate
Argos's share of mind, encourage more browsing missions and inspire customers
to trade up within product ranges, where we will continue to extend our range
of premium brands and will strengthen our design-led own label ranges. We
underperform competitors in terms of attachment rates, with customers only
buying between one and two items per basket, offering a significant sales and
margin opportunity.

 

Financial services will continue to be an important part of the Argos
proposition. Consistent with our recent announcement on the future of our
Financial Services business, we expect to move to third party provision of
Argos financial services products, improving the range and quality of payment
solutions we can offer customers and increasing penetration, currently 21% of
sales.

 

Save and invest to win: Save £1 billion and invest in transforming our
capabilities - taking another big leap forward in efficiency, productivity and
customer focus, continuing to build a platform for growth

 

·      £1 billion of structural cost reduction

·      Modern, well-invested technology platform protecting, competing
and unlocking the next level

·      Simplified, automated more process-led business

·      Right-sized organisation, set up to win

 

Our strong financial position and momentum means we are able to invest capital
to strengthen our business, with a very clear focus on unlocking efficiencies,
driving productivity, enabling growth and delivering higher returns. We will
invest in our technology infrastructure, where more agile, flexible systems
will both protect our current propositions and accelerate the speed at which
we can bring improvements to customers. Investments in machine learning and
intelligent automation will bring greater speed and efficiency to
decision-making in areas such as pricing, proposition, range, logistics and
sourcing. Intelligent technology in areas of the store such as checkouts and
replenishment will benefit customers and efficiency, freeing up colleagues to
deliver better customer service.

 

Our Save to Invest cost saving programme was key to the delivery of our Food
First strategy, creating the fuel to invest in the customer proposition and
reset our value position. We made bold decisions on business structure and
propositions and changed the way the business approaches cost, doubling the
rate of cost saving delivery versus prior years.

 

We will unlock a further £1 billion of operating cost savings over the next
three years, more than offsetting cost inflation. High-returning investments
in technology and automation will drive big steps forward in efficiency -
automating, optimising and prioritising high volume tasks and driving better
forecasting. Productivity benefits will be delivered increasingly through
end-to-end programmes, making cost trade-off decisions across a full cross
functional chain of costs, rather than through independent divisional
programmes. We have already successfully trialled and delivered benefits in
end-to-end transformation with a trial within one particular supermarket
cluster, where we have optimised range and streamlines the operating model,
through reduced deliveries, waste and replenishment costs. We are now rolling
this approach out to the full cluster of around 90 stores.

 

We will continue to unlock significant savings through projects such as the
consolidation and optimisation of our general merchandise distribution
network. This is already underway and will reduce working capital and double
productivity through using fewer, bigger depots and extending the use of
robotic automation.

 

Presentation materials from today's Strategy Update will be made available
later in the day on the Results, Reports and Presentations
(https://www.about.sainsburys.co.uk/investors/results-reports-and-presentations/results-reports-and-presentations)
page of our website.

 

 Enquiries
 Investor Relations    Media
 James Collins         Rebecca Reilly
 +44 (0) 7801 813 074  +44 (0) 20 7695 7295

 Tim Fallowfield, Company Secretary and Corporate Services Director, was
 responsible for the disclosure of this announcement.

 

 1.. Nielsen panel data, Total FMCG excl. Kiosk & Tobacco. Primary shopper
 numbers. 23/24: 44 weeks to 6 January 2024
 2. CSAT Supermarket Competitor Benchmark
 3. Kantar Worldpanel+, General Merchandise Value Market Share, 52 weeks to 24
 December 2023
 4. SimilarWeb traffic share, 12 weeks to 6 January 2024

 

 

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