It hasn’t been smooth sailing for the UK’s second-biggest grocer this year, and the Sainsbury’s share price has been well and truly in the doldrums since the Competition and Markets Authority (CMA) put the kibosh on its merger deal with Asda earlier this year.
With the release of the supermarket’s Q1 trading statement on 3 July, traders will be looking to see whether there is likely to be a turnaround plan implemented any time soon, or whether Sainsbury’s shares are likely to continue languishing around their lowest level in close to 30 years.
When the merger was announced back in April last year, Sainsbury’s shares were up 15% initially. While the move was still subject to regulatory approval at the time, it was said that if the merger went ahead it would be worth £7.3 billion. A successful merger between the second- and third-largest supermarkets by market share would have put them in first place, strengthening their position against the disruptive deep-discounters Aldi and Lidl. It was that pending regulatory approval that would end up sucking the wind out of the sails for Sainsbury’s shares in 2019.
CMA scuppers the Sainsbury's-Asda merger
In February, the CMA announced its provisional findings on the proposed Sainsbury’s-Asda merger, stating that the merger may lead to higher prices and reduced quality. Two months later, the CMA torpedoed the merger based on the findings of their year-long investigation, which established that the UK's shoppers and motorists would be worse off as a result of the deal. The chair of the CMA inquiry group said “It’s our responsibility to protect the millions of people who shop at Sainsbury’s and Asda every week.”
Sainsbury’s share price: more headwinds
Buffeted by shrinking margins and a tough retail environment, Sainsbury’s is feeling the squeeze from the German discounters Aldi and Lidl on the one hand, and its more immediate peers of Tesco and Asda on the other. It continues to vie with Asda for that number two position in terms of market share, and has lost more of its market share to Aldi and Lidl than the other big four UK supermarkets.
While Sainsbury’s does have the advantage of its Argos division, management appears to have lost sight of how to take the business forward now that the Asda deal has been sunk. Adding to the challenges are Sainsbury’s low margins, which are tight (currently close to 1%), even for the notoriously low-margin retail shopping sector – and they’re likely to get tighter. The supermarket is less competitive on margins on ‘commodity items’ when compared to Tesco and Asda, as well as the discounters, where these items represent 40% of sales.
With the Sainsbury’s share price floundering at all-time lows, and down 40% from a year ago, it’s also controversial that CEO Mike Coupe is in line for a £3.9 million bonus, helping to boost his pay by 7% from last year. Clearly there is still some confidence that he has what it takes to get Sainsbury’s back on an even keel.
Will the Q1 numbers turn the tide?
Expectations are that the Sainsbury’s Q1 update this week will show a slight fall in sales, due to the tough comparison with last year’s Q1 results which were boosted by the royal wedding and the football World Cup. Cost control is likely to gain a much bigger focus if the supermarket hopes to retain market share, particularly if sales continue to struggle. Keep an eye out for the Q1 results on Wednesday morning to see the impact on the Sainsbury’s share price.
Update: Read our analysis on the figures and the early impact on the Sainsbury's share price here.