Sainsbury’s plc has been operating in the UK market since 1869. Annual report’09 suggests that the company is currently serving 18 million customers each week with the strength of 150,000 staff. It floated itself in 1973 under London Stock Exchange 1973 as the biggest floatation at the time. To understand any strategy for any company, it is important to know what the key strengths, weaknesses, opportunities, and threats are for the company. Sainsbury’s historically has been renowned for its fair pricing.
Furthermore, when the economic recession started, they introduced a new pricing strategy named “good, better, best” pricing structure to meet the customers’ needs of matching their budget. This strategy turned out to be stronger and also a competitive advantage. Sainsbury’s own vast numbers of its own branded product which are mostly known as ‘Sainsbury’s basic’ products, attracting a large number of customers who do not want to spend a lot. A significant presence in the UK market is also a strength of the company. They currently own 16% of the whole UK market having 18 million customers turn up each week.
Poor IT infrastructure is true, Sainsbury’s one of the weaknesses. The company had to compensate each of the 10,000 customers with 10 vouchers who could not browse their online store for two days due to a faulty IT system. Expansion through acquiring is a big opportunity for the company. It recently acquired 24 new stores from co-operative in the fiscal year 2009 and planning to acquire more than 50 new stores in the convenience store segment. The high a...
mount of competition amongst the rivals is the biggest threat for Sainsbury’s.
Although they are practicing “good, better, best” price design but some low pricing supermarkets, like Aldi, Lidl, are threatening to lose customers. Liquidity: To measure the liquidity of any company, the first two tools that come first are the current ratio and the acid-test ratio or quick ratio. Martin et al. (2005) described that the current ratio of a company measures its liquidity by its liquid asset relative to its short-term debt. On the other hand, the quick ratio is calculated similarly but the amount of inventory is excluded from the current assets first.
For retail-based conglomerates, it is very important to control the inventory to keep the profitability up. The current ratio and the quick ratio for the years 2009, 2008 and 2007 are 0.54, 0.61, 0.70 and 0.30, 0.34, 0.51 respectively. These figures indicate that the company is able to pay each pound of short-term liability by the mentioned pound amount of current assets and the trend has been decreased in liquidity in the recent year. The total amount of working capital for the years 2009, 2008 and 2007 have been throughout negative.
This means that the company’s current liabilities are exceeding the number of current assets. According to the Chief Finance Officer in the annual report of 2009, new short-term financing was organized through two revolving credit facilities. The first one is due in May 2011 of 163m and the other one is due in February 2012. The company’s strategy to maintain the working capital is to do by cas
trade and also by improving stock days. The stock turnovers (days) for Sainsbury’s for 2009, 2008 and 2007 are 14.07, 14.76 and 13.48.
The revenue for Sainsbury’s has constantly increased in the last five years which led the company to manipulate on the increasing the profit margin and other profitability measures. The company’s revenue jumped to 1.89b in 2009 from 1.72b in 2007 which is an increase of 9.9%. However, the gross profit decreased by 11.6% and operating profit increased by 29.42% in the same period of time. The reason was that the revenue did not increase in proportion to the cost of sales. Gross margin is the amount left from the revenue after deducting the direct cost of sales. Sainsbury’s Gross Margin was 5.8, 5.62 and 6.83 accordingly in the year 2009, 2008 and 2007. The operating profit is the amount left after subtracting the indirect cost or the overhead and operating margin is the measure that indicates how much the operating profit is of the total revenue.
In 2009, the operating profit was 3.56% which was slightly above the previous year. After deducting all the expenses, the left amount is the net profit and the proportion of net profit in respect to total revenue is the net profit margin. Sainsbury’s net profit margin for the years 2009, 2008 and 2007 were 1.3%, 1.84% and 1.89% respectively. The management thinks that the tough market condition and the other competitors with very cheap pricing have pushed them to squeeze their profit margin ratio. The graph below shows the Return on Capital Employed as well. The ROCE gives the idea about how much return a company is making on its used capital. The ROCE for the company was 9.46%, 7.10% and 7.59% for the years 2009, 2008 and 2007 respectively. The year 2009 proved to be a little bit more in the context of return on capital employed.
Now, if these figures are compared with the market leader, it will be clearer about the company’s profitable position. In the years 2009, 2008 and 2007 TESCO, which is the market leader for the market Sainsbury’s are operating, also performed very well. TESCO’s revenue also took a steep upward curd between 2007 and 2009. Their revenue increased by 29.4% to 54327m in 2009 from 42641m in 2007. TESCO’s ROCE was 11.44%, 14.02 and 15.90% in the mentioned years. The gross margin and operating margins were 7.76%, 7.67%; 8.12% and 5.9%, 5.9%; 6.2% for the above-mentioned years respectively.
This section represents how the company’s finance has been done. The section can be very interesting toward the investors who are willing to invest in Sainsbury’s plc. These tools will measure whether the money we invest is safe or at a very high-risk position. The debt ratio illustrates the total amount of liability, both current and non-current, in contrast with the amount of the total asset a company posses. (Arnold 2005) This shows that if company’s ability to pay off its debt covered by the amount of asset they have.
On the other hand, the gearing ratio shows how the company’s finance is funded, whether it is doing business with
- Capital Accumulation
- Capital market
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- Discounted Cash Flow
- Foreign Direct Investment
- Fundamental Analysis
- Futures Trading
- Gross Profit Margin
- Internal Rate Of Return
- Ponzi Scheme
- Venture Capital
- Weighted Average Cost Of Capital
- Working capital
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