J SAINSBURY confirmed its sales rebound yesterday by reporting a second consecutive quarter of sales growth — but the City expressed concern that the rise came at the expense of profit margins.
Britain’s third-biggest supermarket group reported a 1.3 per cent rise in first-quarter like-for-like sales, excluding petrol, following a 1.7 per cent increase in the fourth quarter.
This represents the supermarket’s first consecutive underlying sales increase for two years and confirmed that the previous quarter’s return to growth was not a one-off.
However, Sainsbury’s shares fell slightly, by ¾p to 290p, as it emerged that the group had dropped prices by a further 1.1 per cent in the first quarter, which ended on June 18. The price reduction was on top of a 1.6 per cent decline in the previous quarter.
Paul Smiddy, an analyst at RW Baird, said: “Sainsbury’s sales growth is coming from increased investment in staff and its supply chain and price cuts. The real challenge over the next two years is to achieve profitable sales growth and it is too early to say whether Sainsbury’s can achieve this.”
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Nathan Cockrell, an analyst at Credit Suisse First Boston, added: “The recovery will be a long haul — while we think (Justin) King (the chief executive) is doing many sensible things, he is not guaranteed success, especially against the might of Tesco.”
Other analysts said that Sainsbury’s was right to cut prices because it was essential to rebuild the company’s customer base. It could then concentrate on selling its customers more products, which would give it greater buying power and help to raise margins again, they said.
Sainsbury’s, which has also benefited from a defection of customers from Safeway stores that have been rebranded as Wm Morrison, said yesterday that the value of spending per customer was higher in the first quarter than the previous 12 weeks, reversing the declines it has seen in recent quarters.
Justin King, formerly head of food at Marks & Spencer, was brought in as chief executive in March last year to replace Sir Peter Davis.
Mr King is now nine months into a three-year strategy to turn Sainsbury’s around, principally by hiring 3,000 frontline staff to improve service in stores and by investing heavily to improve its supply chain.
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Sainsbury’s has been dogged by supply problems that have frequently left its shelves without popular items. Mr King brought in Lawrence Christensen, former group operations director of Safeway, in September to oversee the supply chain.
Analysts said that the shelves were now looking much better stocked and attributed this in part to better communication between the branches and the central supply system.
Mr King said: “It will be a long time before we can say our supply chain is fixed. We’ve got to get on with the long haul of changing the depots and systems that lie behind the problems that we’ve had.
“Customers are increasingly seeing the benefit of our better availabilty as we improve the instore experience.”
Sainsbury’s has reduced the price on 7,000 of its items 1,000 this year. In October the supermarket said it would spend £400 million on lowering prices in the following three years.