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.
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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.
TABLE OF CONTENTS
1 SAINSBURY OVERVIEW 1
1.1 Sainsbury Accounts 1
1.2 Sainsbury Financial Tools 1
2 SAINSBURY RATIO ANALYSIS
1. SAINSBURY’S OVERVIEW
Sainsbury is the UK’s third largest supermarket. Their main competitors are
Tesco, Asda and Morrison.
Presently, Sainsbury operates 504 supermarkets across the UK, employing
approximately 150,000 employees1.
1.1 Sainsbury Accounts
Sainsbury annual fiscal year ends in the third week of March each year. They
previously used the UK GAAP accounting format up until 2005 and in 2006
they changed over to the IFRS. Their auditor is PricewaterhouseCoopers. The
company uses the going concern concept2.
1.2 Sainsbury Financial Tools
The financial tools used are the Income statement, Balance sheet, Cash flow
statement and financial ratios3. Table 1.2 below shows the important figures
extracted from the financial tools.
INCOME 2009 (£m) 2008 (£m) 2007 (£m) 2006 (£m)
1 Sainsbury Online www.j-sainsbury.co.uk2 This ensures that the company will continue to operate in the foreseeable future.3 Financial information obtained from London Stock Exchange. Refer to Appendix 1, page…
Long Term Debt 2,177 2,084 2,090 2,178CASH FLOW 2009 (£m) 2008 (£m) 2007 (£m) 2006 (£m)Net Cash Generated from Operating Activities
1,206 998 830 780
Proceeds from disposal of Property, plant and equipment
390 198 106 164
Dividends paid to shareholders
218 178 140 131
Cash at end of year
599 601 765 842
Trends of Financial Statements: Sales grew by 20% over the period 2006-2009. Responses to changes in the economy are effective, evident by a stable financial position and slight growth. Gross Profit increased slightly from 2006-2007 but declined slightly in 2008. There was a significant net profit increase from 2006-2007.
Balance Sheet figures shows slight growth and some stability in stocks and goodwill. Liabilities decreased significantly from 2006-2007. This trend indicates that borrowing decreased due to high interest rates. Assets continue to decrease from as much as 20.6% for the period 2006-2008.
Cash flow indicates that Sainsbury is liquid and has managed to maintain stability and slight growth. Sainsbury recorded £57 million in profits in 2009 from the sale of eight supermarkets. Because of this, they have sufficient cash to manage their operating activities, reduce overall debt, restructure the company and increase discounts and marketing. However there was a 28% decline in cash at year end. This might have occurred by the revamping of their value chain to adjust to economic changes.Table 1.2: Sainsbury Key Financial Figures 2006-2009Source: London Stock Exchange (2009)/Researcher (2009)
Despite the downturn, Sainsbury profits continued to increase. Gross profits
dipped a bit in 2008 but the company had various strategies in place to
emerge successful in 2008 – 2009. In this report, mostly the financial ratios
are analysed to provide an overview of Sainsbury performance over the past
two years.
2. SAINSBURY RATIO ANALYSIS
According to Maclaney and Atrill (2002), ‘…ratios provide an overview of the
The ratios above illustrate a moderate decline in profitability in 2008 when
compared to 2007. In 2008, the UK began to experience the effects of the
downturn which is evident according to the table above. However, when
comparing 2008 to 2009, the figures suggest that profitability increased by
approximately 3% overall. Sainsbury responded to the economic slowdown
through their profitability. The downward profitability in 2008 was most likely
due to changes in policies and practices to tackle inflation and increases in
food prices in a competitive industry.
Furthermore, the market conditions instigated a change in purchasing
behaviour which triggered Sainsbury to cut wastages by revamping their value
chain and intensively increasing promotions. These actions showed growth
results in 2009 as ROCE and NPM increased slightly.
2.1.1 Gross Profit Margin
GPM over the 2008 and 2009 have decreased slightly by 1.35% due to the
downturn but still maintain healthy figures which are above industry average.
Interestingly though, sales increased throughout 2006 to 2009, however,
expenses also increased contributing to the slight decrease in the GPM4.
Because of decreased disposable household income Sainsbury acted swiftly
to diversify risks to ensure they maintain their GPM.
2.1.2 Net Profit Margin
Table 2.1 revealed that NPM increased by 0.59% from 2008 to 2009 and by
0.53% over 2006 to 2009. These increases continue despite the economic
slowdown showing their financial power. It is well above industry average of
0.92% because strategic plans were properly planned and executed and
sales volume increased without increasing costs.
2.1.3 Return on Capital Employed
4 Refer to Table 1.2 on Page
ROCE from 2008 to 2009 increased by 20% mainly because of proceeds
attained from property disposal, used to finance overall operations. From
2007 to 2008, however, it decreased slightly because of oil related costs and
increased business rates. Nevertheless, the general trend from 2006 to 2009
indicates proper assets utilisation and investor confidence.
2.2 Liquidity Ratio Analysis
According to Robinson et. al (2009, p.795) liquidity ratios are ‘Financial ratios
measuring the company’s ability to meet short-term obligations’. Sainsbury
liquidity ratio analysis is illustrated in Table 2.2 below.
2009 2008 2007 2006 Remarks
Current Ratio Industry –
0.70 : 1
0.66 : 1 0.71 : 1 0.80 : 1 0.59 : 1Ratio increased by 0.21from 2006-2007, but from 2007-2009 it decreased slowly. Figures are in line with industry figure.
Quick Acid Test Industry –
0.69 : 1
0.31 : 1 0.40 : 1 0.50 : 1 0.68 : 1 Sainsbury experienced a downward trend from 2006-2009 and have fallen behind the industry figure.
Shareholder’s Liquidity
1.27 : 1 1.92 : 1 1.74 : 1 0.98 : 1 Shareholder’s liquidity showed growth from 2006-2007 but declined in 2009.
Table 2.2 above indicates that Sainsbury has adequate current assets to
match their current liabilities; however in 2009 the current ratio dropped
slightly below the industry average. Current assets are continuing to decrease
most likely from investing rigorously in long-term ventures or because current
liabilities are rising faster than current assets. Sainsbury used their liquid
assets to finance their business through marketing and promotions to make it
profitable, hence profitable during the downturn.
2.2.2 Acid Test Ratio
Acid Test Ratio illustrates a steady decline by almost 50% over 2006 to 2009.
It continuously fell below the industry average as well. Nevertheless,
Sainsbury has a remarkable debtor payment period5 and recovered debts
quickly even during the downturn. Therefore, the decline in the quick ratio
may have resulted from investing in long-term activities to ensure profitability
and increase market share.
2.2.3 Shareholder’s Liquidity
Shareholder’s Liquidity have increased during the downturn overall by 25%
but declined in 2009. However, the figures from Table 2.2 illustrates that
shareholders should be satisfied as Sainsbury is still managing to remain
profitable well into the long-term.
2.3 Efficiency/Activity Ratio Analysis
Robinson et. al (2009, p.789) stated, ‘Activity ratios are ratios that measure
how efficiently a company performs day-to-day tasks, such as the collection of
receivables and management of inventory’.
2009 2008 2007 2006 Remarks
Debtor Days 4 4 4 49The ability of Sainsbury to recover debts improved tremendously
5 Refer to subheading 2.3.1 on Page …
from 2006. However, from 2007-2009 the debtor payment figure remained constant.
Creditor Days 60 56 62 114In 2006, Sainsbury took a long time to repay their suppliers. From 2007-2009 their payment period to suppliers were shortened from 4 months to 2 months.
Stock Turnover 14 15 13 53 Stock turnover has remained relatively stable during the downturn.
According to National Statistics Online10, Consumer Prices Index (CPI) annual
inflation rate was 4.5% in October, 2008. The largest downward pressure on
the CPI annual rate came from transport costs where the price of fuels and
lubricants fell that year but rose in 200911. Inflation causes prices to increase
and the general market shrink since consumers experience difficulty to
purchase goods and services12.
Fig. 3.1.3: UK Inflation Rate October 2006 – October 2008Source: Adapted from http://www.economicshelp.org/blog/economics/uk-economy-2009/
3.1.4 Interest Rates Decreases
Bank interest rate was decreased from 4.5% in October, 2008 to 1.1% in
September, 2009. Nevertheless, consumers are able to borrow more because
of the low rates. Low interest rates causes savings to decrease and the
weakness of the sterling causes imports to be more expensive. Figure 3.1.4
illustrates the UK’s interest rates as stated by the Bank of England.
10 www.statistics.gov.uk11 This affected the UK financial market significantly since the price of oil is pegged to the sterling pound.12 When unemployment increases, inflation (general rise in prices) also increases.
Fig. 3.1.4: Bank of England Interest Rate March 2006 – September 2008Source: Adapted from http://www.economicshelp.org/blog/economics/uk-economy-2009/
3.1.5 Exchange Rate
The UK exchange rate for 2008-2009 decreased during this period because of
a weakened sterling. From April, 200813 it continued to decline reaching an all
time low at 1.0219 GBP IN December, 2008. This made exported goods
cheaper but imported goods more expensive causing an adverse effect on
businesses.
3.2 Developments in the UK’s Supermarket Industry
13 In March, 2009 the pound began to increase in value and stood its ground at 1.06 GBP thus far. http://www.economywatch.com/exchange-rate/uk-pound-sterling.html
The supermarkets in the UK are no longer limiting themselves to just
supplying food products. In light of financial turmoil, in 2008 they spread their
risks at a time when food inflation soared, to diverse into areas such as
finance, mobile and broadband markets14. This diversification provide
avenues should a slowdown occur in food product sales, they can achieve
sales in other areas.
In 2008, the supermarket industry recorded £123 billion in consumer spending
a huge increase when compared to £119.8 billion in 2007. This shows clearly
that during the downturn, their strategies and financial strength were
successful in remaining competitive.
Table 3.2 illustrates a PESTEL analysis of the developments in the UK
supermarket industry during 2008-2009.
POLITICAL FACTORS
Taxation Policy – the government decreased the rate of corporation tax from 30% to 28%, which will save supermarkets significant sums of money. This means that supermarkets profits will be greater.
Government intervention – Government is investigating claims of price fixing among the major supermarkets and this poses a threat as they may be forced to curtail prices.
The competition commission is constantly monitoring the supermarket industry.
ECONOMIC FACTORS
Rise in unemployment – the UK unemployment figure rose to 164,000 in 2008; the largest increase since 1990 (Weekly Economic Briefing, 2008).
Inflation – Inflation rate decreased, triggered by the sharp fall in the price of crude oil.
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
TECHNOLOGICAL FACTORS
Increase in Technology – New technologies can make service more
During the downturn, more people are starting to prepare home-cooked meals; a change in trend from eating out which is expensive due to food inflation.
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.
Table 3.2: PESTEL Analysis of the UK Supermarket Industry 2008-2009Source: www.marketresearch.co.uk
3.3 Effects of Financial Market on Sainsbury
In 2008, Sainsbury experienced a slower sales growth when compared to
past trends. The effects of the downturn caused Sainsbury to put measures in
place to increase profitability in 2009. Some of the changes to strategies they
made are discussed below.
EFFECTS OF THE DOWNTURN CHANGES MADE TO ADAPT
Increase in unemployment, rise in food inflation and decrease in disposable income.
Household budgets were clearly under pressure from the effects of the downturn. Sainsbury had to slash the cost of essentials and basic products as customers faced the biggest squeeze on income in 50 years. Marketing strategy shifted to focus on cost and their value chain was adjusted to improve layout, increase space, future hedge with suppliers, and shed off unnecessary costs. Customers were demanding low cost products and Sainsbury adjusted to suit demands.
Decreased Interest rate and decreased CPI annual inflation rate.
Sainsbury benefited from decreased interest and CPI inflation rates as more customers were able to take advantage of lower borrowing. Sainsbury took advantage of this by lowering prices, and intensified marketing of their cheaper own label goods.
Lifestyle changes As the economy dipped, more people chose to prepare home-
cooked meals to eliminate the costs attached to eating out. Penny-pinched consumers depended on Sainsbury to provide low cost vegetables and meats from tied in suppliers.
Competitive rivalry, customer loyalty
Fierce competition caused Sainsbury to focus on value, price and advertising while reinforcing excellent customer service 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.
Table 3.3: Effects of the downturn on Sainsbury Source: Sainsbury Annual Reports 2008 and 2009