Opinion: Sainsbury's Coupe has cracks to paper over

They are skills he has called upon time and time again during his four years at the helm of the supermarket giant, circumnavigating tricky questions through his combination of intelligence, charm and unflappable composure.

He may well need to call upon those traits again next week when Sainsbury’s provides the City with its first-quarter trading update.

Although JS is expected to post an increase in like-for-like sales including VAT of around 1.5% for the 16 weeks to June 30, progress with its strategy – and the proposed £13bn tie-up with Asda – will come firmly under the microscope.

Despite moves to streamline its cost base, roll out Argos shop-in-shops and launch a string of other in-store partnerships with the likes of Patisserie Valerie, Zizzi and Ben & Jerry’s, there is a growing sense that Sainsbury’s has found itself on the defensive, at a time when big four rivals Tesco and Morrisons are impressively rebuilding margins and profitability.

Sainsbury’s annual report, published earlier this month, laid bare its long-term margin problem.

Its retail underlying operating margin stood at a relatively healthy 3.65% back in 2013/14.

“Sainsbury’s will need to demonstrate signs of progress with its existing strategy”

That had fallen below 3% by 2015/16 to 2.74%, and in 2017/18 it eroded further to 2.24% – a drop Sainsbury’s insisted was “primarily as a result of the consolidation of a full year of Argos’s results”.

The grocer is battling to rebuild that figure – and its planned merger with Asda would help it accomplish a goal it is struggling to achieve under its own steam.

The additional buying power the combination would bring would allow it to source goods in greater volumes and, consequently, at cheaper unit prices.

But with questions hanging over what sanctions the competition watchdog might impose in order for the merger to go through – and at least another year to go until completion if the mega deal is given the green light – Sainsbury’s will need to demonstrate signs of progress with its existing strategy.

It is on that front where numerous doubts remain.

‘Struggling to progress’

Shore Capital today issued a “material downgrade” of 9% in its expectations for Sainsbury’s underlying pre-tax profit for the full year from £691m to £629m.

The broker’s head of research Clive Black said the market was “clearly witnessing a Sainsbury’s where the core chain is struggling to progress from a profitability perspective”.

He added: “Sainsbury’s is standing still in a period where quoted peers Morrisons and particularly Tesco (from a lower base) are rebuilding margins and profitability.

“As Black concludes, Sainsbury’s position is ‘hardly the firmest basis from which to justify a lead part in a potentially massive merger’”

“We harbour an ongoing concern about the impact that a recuperating Tesco UK may be having upon its nearest competitor, while Asda is no longer a pushover, Morrisons is outperforming and the limited assortment discounters press on.”

Despite its downgrade, Shore Capital retains Sainsbury’s as a hold, but said the Competition and Markets Authority’s probe into the Asda merger “fossilises” the investment case.

A solid start to its 2018/19 financial year would reassure, but with pressure being heaped on its margins, market share and the all-important bottom line, Sainsbury’s boss Coupe has a few cracks to paper over as the business kicks off a crucial year on the back foot.

As Black concludes, Sainsbury’s position is “hardly the firmest basis from which to justify a lead part in a potentially massive merger”.

Coupe may need to be at his brilliant best next Wednesday to allay such concerns in the City.