Strategy & Operations » Leadership & Management » Interview: J Sainsbury CFO John Rogers

Interview: J Sainsbury CFO John Rogers

Sainsbury’s CFO John Rogers tells Financial Director how the supermarket giant is outperforming its rivals in a tough market

THE NEW YEAR brings with it a number of unwanted side effects from the largesse of Christmas. The excesses of the festive period being replaced by a comparative period of austerity and belt tightening.

For some of the nation’s biggest retailers, the festive hangover was more severe than most. Wm Morrison delivered a turkey over the Christmas period, reporting a 2.5% fall in like-for-like sales. Likewise, Marks & Spencer, the bellwether of the UK retail industry, performed much like the weather: dismally. A 1.8% fall in like-for-like sales wiped as much as £270m off the value of its shares at one stage on 10 January.

Sainsbury’s, however, was able to greet its results with a bit more cheer. Admittedly, growth slowed to 0.9% over the period, compared to 2.1% in the same period last year, but this still represented an outperformance of some of its main rivals.

Richard Hunter, head of equities at Hargreaves Lansdown, said Sainsbury’s had “thrown down the gauntlet to Tesco” ahead of its trading update, which delivered a storming return to form, posting a 1.8% rise in sales for the period.

The trading statement led to an ugly spat between the rivals, with Sainbury’s head of investor relations claiming Tesco’s numbers were in breach of certain accounting guidance. That aside, there is no doubt 2012 marked a year in which Sainsbury’s made ground on its rival.

In contrast to Tesco, which issued its first profit warning in 20 years last January and was hampered by its ill-starred expansion into the US, Sainsbury’s managed to chalk up 31 quarters of consecutive growth – rising to 32 when including the post-Christmas trading update. In the half year to 29 September, pre-tax profit before one-off items rose 5.4% to £373m, while like-for-like sales rose by 1.7%. Whereas Tesco posted a 12.4% fall in first-half UK trading profit.

“We have seen a couple of years of like-for-like volume decline in the industry, which put the overall industry under some pressure but actually in terms of our performance, we have done well over the last 18 months, both driving top-line and bottom-line growth,” John Rogers, J Sainsbury CFO, tells Financial Director.

Buying habits

Rogers is happy to describe its half-yearly figures as “brilliant” in terms of Sainsbury’s performance versus the market, but the economic backdrop looms as a check on wilder expectations.

The latest figures – the company’s worst like-for-like sales excluding fuel since January 2005 – go some way to temper expectation. But growth is growth, and 32 consecutive quarters is no mean feat. But what has been the driver? For Rogers, it is a combination of things that all return to one key point: affinity with the customer base.

This, he says, has been achieved through campaigns – usually based on feeding families cheaply and healthily – that connect with customers but, equally important, also provide Sainsbury’s with information about what and how people are buying.

Succeeding and growing market share in a period of austerity requires better customer understanding than ever. Sainsbury’s, like many of its rivals, does this through clever use of technology – particularly harvesting customer data through loyalty card schemes.

“There is an implicit contract with the customer that they share the benefit [of loyalty card points] but at the same time we use their data,” Rogers says. “I think we use that data in a positive way. We have been able to target our marketing to our customers in a way that really adds value to them; we haven’t had to resort to headline, blanket marketing.”

There is no denying that the economic downturn has changed how and what consumers buy, and these changes appear to be lasting – there is a shift towards cooking more meals from scratch, shopping more frequently, and looking out for discounts and deals. This in turn has led to Sainsbury’s investing in quality products – notably investment in its private label offering.

“You have to invest in your customer base and we have done that through our targeted marketing and work to redevelop our private label,” Rogers, says. “One of the aspects of our business is our private label offer. Our sales participation for brand is higher than our main competitors and we are improving that penetration, which is certainly not true of all our competition.”

The fact that the company has continued to succeed during the recession shows how far the retailer has come since Rogers and the current management team joined. In the past, Sainsbury’s would have been hampered by its reputation as an expensive retailer. Rogers, who joined in 2005 before becoming CFO in 2010, explains that Sainsbury’s has redefined that reputation by adapting to its customers’ needs.

“Historically, we had a price/reality issue and were pricing too high compared to the competition,” Rogers explains. “When the new management team took over seven years ago, we made a very conscious decision to address that price/reality gap so we moved that in line with our competition. The challenge was the price perception. It improved but wasn’t completely eradicated.”

A key pillar was its Brand Match campaign – whereby the customer would receive a voucher from Sainsbury’s if branded goods were cheaper at Tesco or Asda. The campaign dropped the company into hot water with the advertising watchdog when it was ordered to change it because it was found to mislead consumers over the finer details.

Nevertheless, the campaign proved to be a great success and was more than a mere exercise in brand management. Indeed, it represents an interesting financial conundrum – that of sacrificing margin for market share.

“We felt Brand Match was an effective way of convincing customers that we were competitive on price and we felt that would drive sales, so net overall that would drive our profits,” says Rogers.

Convenient growth

But price isn’t everything, Rogers explains. While many thought the economic environment meant low prices would be the primary motivator in supermarket choice, Rogers says Sainsbury’s customers are looking for real value: quality without compromise at good prices.

He explains the company also noticed its customers were shopping more frequently and locally to reduce food waste, so it pressed ahead with its convenience growth plans. Growing UK sales space is central to that strategy, which has no doubt been aided by Rogers’ prior experience in charge of property at the supermarket – a post he held before becoming CFO.

Last year Sainsbury’s opened 1.4 million square foot of space, adding 19 new supermarkets and 73 new convenience stores to its estate, bringing its total convenience estate to 440. The vast majority of Sainsbury’s investment – core capital expenditure increased by £102m to £1.2bn due to its extensions – is in rolling out those areas of the business that are growing the fastest, Rogers says.

“There is a fantastic return on capital for the investments we make in that area. They are our best returning investments and we want to do more of those and do them quicker,” he says.

Having delivered the acceleration in space growth, Rogers says Sainsbury will return to space growth of about 5% a year, which will reduce capital expenditure and improve cash flow and returns, as sales from stores mature.

At the same time, Sainsbury’s is also creating valuable property and its portfolio is now valued at £11.2bn, with development activity delivering £83m profits last year. The company took advantage of good property yields to increase its sale and leaseback activity of mature stores with no further property development potential, generating proceeds of £303m.

“Certain leasebacks are a great way for us to recycle our capital. We only do it on what we call our dry stores – stores that we can’t do anything more with – and if the pricing is right, and we can sell it at a competitive yield, it is a great way to release property profits.

“In terms of the overall business, it’s relatively small but it’s a nice little earner and it’s great to be able to recycle that capital and reinvest that cash back into other new stores.”

New services

The rapid growth in space between 2009 and 2012 – which Rogers describes as “pumping prime into our property pipeline” – appears to conflict with its rapid growth in online. The company’s online grocery orders exceed 165,000 a week, with an annual turnover of about £800m, placing it second in the market and making it the fastest-growing online grocery business in the UK, according to its latest annual report.

However, Rogers doesn’t think store expansion and online growth “need to contradict one another”. “In relation to this, I think two can work in synergy,” he says. “We are growing our food online business at about 20% and that’s fantastic.”

Rogers is also keen to stress how the company is exploring new opportunities beyond its core business. Sainsbury’s Bank reported a 40% upturn in pre-tax operating profit, while the supermarket also introduced five GPs and five dental surgeries, as well as its first hospital outpatient pharmacy.

“The synergies between food and retail banking are very strong but not obvious to a lot of people,” says Rogers. “If you give someone a credit card with double nectar points, you encourage them to come back in store. Opportunities to grow the bank are significant.”

He can also see connections between food and well-being services like dentistry and doctors: “Providing opportunities to have dental support is something that aligns quite well to our brand. If you think about what our stores represent,we want to make them part of the community.”

The latest move to diversify its product mix has seen Sainsbury’s launch a movie streaming service and an MP3 download platform under its entertainment brand. The supermarket partnered with Rovi to offer an online, on-demand streaming video, pitting it against streaming services such as LoveFilm, NetFlix, and Tesco, which offers video streaming through its acquisition of BlinkBox.

But could these new products result in Sainsbury’s cannibalising existing areas of its business? To this, Rogers has a simple riposte.

“You can either cannibalise yourself or have someone else do it for you,” he says. “Whether it’s video streaming or DVD streaming, the reality is all these things are moving away from the physical world and moving into the digital world. That’s the direction of the market and it’s a core part of our business. I don’t see why we can’t participate in that.” ?

Share
Was this article helpful?

Leave a Reply

Subscribe to get your daily business insights