Qatar-backed Sainsbury's eyes price cuts, despite 18% fall in H1 profit

British supermarket brand has already invested about $227m in lower prices in the last year
Qatar-backed Sainsbury's eyes price cuts, despite 18% fall in H1 profit
UK supermarket giant J Sainsbury this week moved closer to opening its company books for due diligence to Delta Two, after the Qatari-backed investment fund offered to increase the equity proportion in its 10.6 billion pound ($21.3 billion) takeover bid.
By Reuters
Thu 12 Nov 2015 04:07 PM

Sainsbury's, the British supermarket brand which is 25.9 percent owned by Qatar, plans to cut more prices to close the gap on fast-growing discounters Aldi and Lidl, signalling no let up in a battle that has ravaged industry profits.

Britain's third-biggest supermarket group has already invested about 150 million pounds ($227 million) in lower prices in the last year, funded by cutting costs and dividends.

But CEO Mike Coupe said on Wednesday more was needed, as the company posted an 18 percent drop in first-half profit.

"We've closed the gap reasonably significantly to the discounters. But we still think there's room and opportunities for targeted investment in certain categories," he told reporters, declining to identify the categories for commercial reasons or the quantum of planned investment.

Britain's big four grocers - Tesco, Wal-Mart's Asda , Sainsbury's and Morrisons - have been losing market share to Aldi and Lidl.

Price cuts, coupled with lower commodity prices and currency moves, led to food price deflation of 2.5 percent in the first half of Sainsbury's financial year, hitting sales and profits.

"In an environment of food deflation and competitor price cuts, no one should expect a quick return to increased sales," said John Ibbotson of retail consultancy Retail Vision.

Sainsbury's made a profit before tax and one off items of 308 million pounds for the 28 weeks to Sept. 26, its lowest first-half profit for six years and down from 375 million in the same period last year.

But it beat analysts' average forecast of 293 million and the firm, which has also been in a drive to improve product quality, availability and customer service, has so far proved more resilient than its main rivals.

In September it reported better-than-expected second-quarter sales and raised its profit expectations for the full 2015-16 year.

"I am confident we are making progress and we are looking forward to a successful Christmas," said Coupe.

However, Sainsbury's 2015-16 profit is still expected to be sharply down on the previous year. Prior to Wednesday's update, analysts were on average forecasting 573 million pounds, down from 681 million in 2014-15.

On Monday, Tesco CEO Dave Lewis said UK supermarkets faced a "potential lethal cocktail" of increased costs, namely business rates and the new National Living Wage.

Coupe said he agreed, noting Sainsbury's is the 75th largest corporation in the United Kingdom but its sixth-largest taxpayer.

"We think we bear a significant burden of taxation and we would like the government to look at that."

Shares in Sainsbury's, up 10.4 percent so far this year, reversed early gains to be down 3.4 percent by 1035 GMT.

Established in 1869 and headquartered in London, Qatar Holding bought a 25.999 percent stake in the retailer in February 2010.

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