Britain’s biggest supermarkets will reveal a slide in Christmas sales this week, underlining the pressure placed on the industry by changing shopping habits and the growth of discounters Aldi and Lidl.
The grocery market will be in the spotlight as Sainsbury’s, Morrisons and Tesco report on their performance during the vital festive period. Sainsbury’s shareholders will be particularly interested in the trading updates as they consider whether to support the company’s plan to bid for Home Retail Group, the owner of Argos.
Analysts have warned that a bid for Argos could distract Sainsbury’s, which has outperformed its closest rivals in recent years. The supermarket is planning to launch an improved takeover bid for Home Retail worth more than £1bn, and is seeking to make an offer attractive enough be taken seriously while winning the support of its own shareholders.
Sainsbury’s is expected to reveal a 0.7% fall in sales at established stores in the three months to the end of December. That compares with a 2% slide in the nine weeks to 3 January expected at Morrisons, which will be the first of the listed chains to report on Tuesday.
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Tesco is expected to be a Christmas loser, with underlying sales down by between 2% and 3% in the three months to the end of November, and slightly better than that over Christmas.
Asda, the other member of the so-called “big four”, has cranked up the pressure on its rivals by committing another £500m to cutting prices. The Leeds-based chain, which is owned by Walmart, experienced a 3.5% drop in sales during the Christmas period, according to estimates by analysts.
On Tuesday, market share figures will be released by Kantar Worldpanel showing which chains gained or lost market share over the key trading period.
Waitrose has already revealed a 1.4% fall in sales in the six weeks to 2 January; the upmarket grocer said record sales in the three days before Christmas were offset by a very slow run-up to New Year’s Eve. Despite this decline, managing director Mark Price predicted the chain would gain market share.
The Co-op is understood to have enjoyed underlying sales growth at its convenience stores over Christmas. It said sales of mince pies soared by 37%, while prosecco sales were up 1.4%.
Steve Murrells, retail chief executive at the Co-operative Group, said: “We witnessed a strong trading performance across the key festive trading weeks. And it’s clear from our sales data that convenience shopping was in the ascendency this Christmas, with more customers opting to shop little and often.”
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However, discounters Aldi and Lidl are likely to have been the biggest winners over Christmas, with both chains maintaining double-digit sales growth – a stark contrast to the performance of the “big four”.
Home Retail, which also owns Homebase, is scheduled to report its third-quarter figures on Thursday. Sainsbury’s announced last week that it had made an approach in November to buy the retailer with cash and shares.
Analysts believe Sainsbury’s could afford to pay between £1.3bn and £1.4bn for Home Retail because of potential efficiencies that could be made by joining the two groups. This would include between £100m and £150m from closing Argos stores and instead opening concessions within Sainsbury’s supermarkets.
Analysts at Exane said that Sainsbury’s could justify paying up to £1.3bn, or 160p a share, for Home Retail, whereas Investec said the group could be worth £1.45bn. However, some Home Retail shareholders, such as Richard Buxton at Old Mutual Global Investors, have said they will not accept less than £1.6bn, or 200p per share.
One of Sainsbury’s tasks will be to bring onside its largest shareholder, the Qatari Investment Authority (QIA). The QIA has always made clear that it does not wish to pour more money into the supermarket group. However, it also does not want its 25.1% share to be diluted. If Sainsbury’s issues new shares as part of any deal, the Qataris will either have to buy more or see their stake diminish.
If the QIA is uneasy about new shares being issued, Sainsbury’s chairman David Tyler might seek instead to fund the entire deal with cash and the proceeds from a recently drawn down £1.15bn credit facility. Sainsbury’s could also raise £150m to £200m by selling off the Homebase chain.
Sainsbury’s has until 2 February to make a further offer or walk away, under the City’s takeover rules. The supermarket group’s share price has slumped 6% to 242p since it was forced to reveal its bid last Tuesday. In contrast, shares in Home Retail have risen almost 40%.
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