Sainsbury sees no end to falling grocery prices

Sainsbury said there's no end in sight to the falling grocery prices that have blighted the UK supermarket industry as a price war dented first-half profits.

Food price deflation will continue at least until the end of the company’s financial year in March, chief financial officer John Rogers said on Wednesday. Asked about the prospect of a further decline in Sainsbury’s earnings, the executive said “it’s a difficult question to answer.”

The gloomy outlook tempered investor optimism arising from Sainsbury’s surprise announcement in September that full-year earnings would moderately surpass analysts’ estimates.

The company reported a smaller drop in first-half profit than analysts expected on Wednesday, though the shares fell as much as 5.6 per cent.

“Visibility towards earnings is moderate,” Clive Black, an analyst with Shore Capital, said. “The sector is still fragile.”

The stock was down 4.7 per cent at 259.8 pence as of in early afternoon trading in London, the steepest drop in the FTSE 100 Index.

Sainsbury’s underlying pretax profit fell 18 per cent to £308 million in the first half.

As UK grocers scramble to halt market share losses to discounters Aldi and Lidl, the company has ploughed £200 million into lowering prices. Same-store sales have now declined for seven consecutive quarters.

To compensate for falling revenue, Sainsbury has been looking to cut costs and now expects to make £225 million of savings by the end of its fiscal year, an increase of £25 million on its previous forecast.

Mr Rogers said that planned savings had been made quicker than expected and the company’s target of cutting costs by £500 million pounds within three years is under review.

“It’s a self-fulfilling prophecy that if you reduce promotional activity, efficiencies just keep coming through,” Bryan Roberts, an analyst with Kantar Retail, said by phone. “There are no signs of any panic buttons being hit.”

- Bloomberg