The effects which the economic downturn had on Sainsbury

FINANCIAL ANALYSIS OF SAINBURY’S

ABSTRACT

The aim of this report will be to analyse the effects which the economic downturn had on Sainsbury financial market and performance over the years of 2008 and 2009.

The report will be dissected into four main areas. Firstly, an analysis and

evaluation of Sainsbury financial performance using ratios as a tool will be

obtained from the annual reports of 2008 and 2009. A trend analysis will be

done to demonstrate the pattern of Sainsbury financial performance over the

years 2005 to 2009. Furthermore, an analysis and evaluation of

developments in the supermarket industry will be done for the years 2008 and

2009.

In addition, a ‘what if’ analysis of the probable financial performance of

Sainsbury, had the downturn not ensued will be conducted. Finally,

conclusions of the report will be discussed to reveal if the company was

prepared and how well they handled the pressures of the downturn to

minimise impact on their financial performance.

QUESTION 1- An analysis and evaluation of the data available in the organizations’ annual reports. 30%

QUESTION 2- An analysis and evaluation of the development in the financial markets during the last two years with reference to their effects on your chosen organization. 20%

Answer

Sainsbury’s works in a highly competitive market. The UK food retailing industry is mainly ruled by four big players- Tesco, Asda, Sainsbury and Morrison’s. Together they all control approximately 75% of the UK’s market. Market leaders are adopting low cost strategy which is benefited to consumers and increasing demanding. High competition in market makes market leaders to become highly innovative to grow market share by focusing on value, price, advertising and customer satisfaction.

DEVELOPMENT IN THE UK’S SUPERMARKET INDUSTRY

The supermarket in the UK are no longer controlling themselves to just supplying food products to consumers. In 2008, financial downturn made supermarket industry to spread their risks at a time when food inflation climbed, to diverse into areas such as finance, mobile and broadband markets. This diversification provides opportunities to slowdown sales in food product, as they achieve sales in other areas. In 2008, the supermarket industry recorded £123 billion in consumer spending a huge difference when compared to £119.8 billion in 2007. This show clearly to remain competitive their strategies and financial strength were successful during the downturn period.

.PESTAL ANALYSIS

POLITICAL FACTORS

Taxation Policy- rate of corporation tax was decreased by government from 30% to 28%. This means supermarkets profit will be greater by saving substantial amount of money.

Government interference- government put his rights of price fixing among major supermarkets which poses a threat as they may have to control prices.

ECONOMIC FACTORS

Increase in employment- in UK employment figures rise to 164,000 in 2008.

Inflation- because of fall in prices of crude oil, inflation rate decreased.

Rate of interest- interest were decreased by 2% in 2008, consumer spending were increased.

Disposable income-

.

· Interest Rate – Decreased by almost

2% in 2008, which can increase

consumer spending.

· Disposable Income – ONS revealed

that with earnings growth on a

downward trend due to the

weakening labour market, families’

real disposable income can be

‘squeezed’. This can affect sales fro

supermarkets.

·

SOCIAL FACTORS

· Lifestyle Changes – People are

purchasing healthy foods and are

being more health conscious.

· During the downturn, more

people are starting to prepare homecooked

meals; a change in trend

from eating out which is expensive

due to food inflation.

TECHNOLOGICAL FACTORS

· Increase in Technology – New

technologies can make service more

convenient and increases customer

satisfaction, leading to a competitive

advantage and increase in sales.

ENVIRONMENTAL FACTORS

· Green Issues – Supermarkets are

investing in green issues by using

less plastic, recycling wastes and

shifting to environmentally friendly

procedures. Profits are used for this

but sales can increase because

consumers are demanding

environmentally friendly products.

LEGAL FACTORS

· Foreign trade restrictions – Imports

attract taxes and tariffs making goods

more expensive. Customers may

then demand substitutes

EFFECTS OF FINANCIAL MARKET ON SAINSBURY

In 2008, Sainsbury experienced a slow growth when compared to past results. Due to the downturn Sainsbury adapted some measures to increase its profitability in 2009. Some of the changes they made are discussed below.

Increase in food inflation, rise in employment and decrease in disposable are the effects of the downturn that made Sainsbury to adapt some changes for a better performance.

Household budget were under burden from the effect of the downturn. Sainsbury had to reduce the cost of basic products which customer faced as the biggest squeeze of income in 50 years. To improve layout, increase space, future hedge with suppliers and reduce unnecessary cost, marketing strategy need to be shifted to focus more on cost as well as adjust value chain. As customers were demanding low cost products, Sainsbury adjusted according to demand.

Interest rate and CPI annual inflation rate decreased and standard of living changes are also the effects of downturn. Due to decreased interest and CPI inflation rate it benefited Sainsbury as more customers were able to take advantage of lower borrowing. Sainsbury took advantage of this by reducing prices and strengthened marketing of their cheaper own label products. People living of standard changes as the economy dipped, more people decided to make home cooked meals just to reduce the cost attached to eating out. Penny pinched consumer were dependant on Sainsbury to provide low cost vegetables and meats.

Competitive rivalry and customer reliability caused Sainsbury to focus more on price, value and advertising while strengthened excellent customer service. Sainsbury annual report (2009) specified that a clear strategy was developed to focus on five areas:

Sainsbury annual report (2009) stated that a clear strategy

was developed to focus on five main areas: great product at

fair prices, increase growth of non-food ranges, additional

marketing channels to reach more customers, increase space

and active property management (includes disposal of

property and investing in increasing space in profitable areas).

Sainsbury increased promotions and marketing strategies

such as ‘Making Sainsbury’s Great Again’, loyalty discount

cards, online shopping, cheaper and high quality own brand

goods and increase in technology and faster checkout time.

They additionally branched out spreading risks into the

financial sector, oil-related areas and department stores.

QUESTION 3- ‘What if’ analysis of the possible financial performance that might have existed had the downturn not occurred. 30%

SUMMARY

CONCLUSIONS