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Sainsbury’s warns over pay squeeze as profits fall

Sainsbury’s has warned that a squeeze on real pay growth and lower consumer confidence is hitting non-food sales as it revealed a third consecutive year of falling profits.

The supermarket chain’s pre-tax profits slid by 8.2% to £503m in the year to 11 March despite a 12.7% rise in group sales to £29.1bn, partly thanks to the acquisition of Argos last year. Analysts are expecting a further fall in profits for the year ahead.

Shares in Sainsbury’s dipped nearly 2% as the company missed the City’s profit expectations by about 1%.

Chief executive Mike Coupe said that the past year had been “one of the most interesting and challenging and volatile years in my working lifetime”.

After more than two years of deflation, food and fuel prices are starting to rise, driven by the devaluation of sterling and commodity price increases, and benefiting food retailers.

But Sainsbury’s warned this would have an impact on its newly enlarged non-food business.

“General merchandise and clothing sales growth have been impacted by reduced consumer confidence and a marked slowdown in real pay growth. Economic commentators are divided on the implications for the UK economy, but there are fears that this slowdown in real income might drive a reduction in GDP growth, an increase in unemployment and a reduction in the rate of unsecured credit growth,” the company said in a statement.

Coupe defended his acquisition of the Argos chain, which has dramatically increased Sainsbury’s footprint in general merchandise. He said that despite the difficult backdrop, Sainsbury’s was “well set up” and had increased its share of the non-food market in a challenging environment.

He said the Argos acquisition would enable Sainsbury’s to increase its market share in a “relatively unconsolidated market where we have relatively small share in very large markets”. Clothing sales rose by more than 4% over the year, for example, well ahead of the wider market.

Coupe insisted that the company had a three- to five-year plan to move towards “strong and steady” profits growth.

While sales fell by 2% in Sainsbury’s core supermarkets amid heavy competition from upstart discounters Aldi and Lidl and changing shopping habits, Coupe said the company was investing in growth areas including online groceries and convenience stores, where sales rose by more than 8% and 6% respectively over the year.

The group is also accelerating plans to put Argos outlets in its big stores because they helped attract more shoppers. It wants 250 Argos stores in its supermarkets by March 2019 – up from 59 at present – six months earlier than planned.

Coupe said 13 of the 59 new Argos outlets had relocated from high streets, helping the business to save significant costs, but that pattern could not be taken as template for future openings.

The step up in Argos openings comes as sales at the outlets within Sainsbury’s stores open more than a year continue to grow by between 20% and 30% and help lift grocery sales in their host supermarkets by 1% to 2%.

Coupe said that Argos’ profits had been at the top end of expectations and he was “pretty pleased with its performance” as it had so far been able to mitigate against cost increases caused by the fall in the value of sterling. Things may get more tricky after June when Argos’s pre-Brexit currency hedge runs out.