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 STATEMENT 2009 (£m) 2008 (£m) 2007 (£m) 2006 (£m)
1
Sainsbury Online www.j-sainsbury.co.uk
2
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…
Sales 18,911 17,837 17,151 16,061

Gross Profit 1,036 1,002 1,172 1,067

Total Operating 18,968 17,867 17,168 16,062

Income
BALANCE SHEET 2009 (£m) 2008 (£m) 2007 (£m) 2006 (£m)
Goodwill 114 114 112 109
Stocks 689 681 590 576
Cash & Equivalent 627 719 1128 1080
Total Current 1591 1610 1915 3845
Asset
Total Current 2919 2605 2721 4810
Liabilities
Long Term Debt 2,177 2,084 2,090 2,178
CASH FLOW 2009 (£m) 2008 (£m) 2007 (£m) 2006 (£m)
Net Cash 1,206 998 830 780
Generated from
Operating
Activities
Proceeds from 390 198 106 164
disposal of
Property, plant
and equipment
Dividends paid 218 178 140 131
to shareholders
Cash at end of 599 601 765 842
year
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 2006-2009
Source: 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
business’s financial condition’. Similarly, Wood (2002) stated, ‘Ratio analysis
is a first step in assessing an entity’. The effects of the downturn experienced
by Sainsbury are demonstrated by the following ratios below. A four year
trend analysis will highlight Sainsbury’s performance two years prior to the
downturn and the two years during the downturn.

2.1 Profitability Ratio Analysis

Maclaney and Atrill (2002, p. 197) stated, ‘Profitability ratios provide an insight
to the degree of success in achieving the purpose of the business’. The table
below demonstrates Sainsbury profitability ratios.

2009 (%) 2008 (%) 2007 (%) 2006 (%) Remarks

Gross Profit 5.48 5.62 6.83 6.64 GPM increased from
Margin (GPM) (0.14% (1.21% (.19% 2006 to 2007 by 0.19%.
 Industry – decrease decrease increase In 2008, it fell by a
3.53% from 2008, from 2007) from 2006) margin of 1.21% from
1.35% 2007. GPM in 2009
decrease continued to fall in small
from 2007 figures.

Net Profit Margin 3.56 2.97 3.03 1.43 NPM increased by

(NPM) (0.59% (0.06% (1.60% 1.60% from 2006 to
 Industry – increase decrease increase 2007. During the
0.92% from 2008, from 2007) from 2006) downturn in 2008, it fell
0.53% by only 0.06% from
increase 2007. However, it
from 2006) increased by 0.53% in
2009.

Return on Capital 9.46 7.06 7.59 2.89 ROCE almost tripled

Employed (ROCE) (2.40% (0.53% (4.70% from 2006 to 2007. In
increase decrease increase 2008, it fell by 0.53%. In
from 2008, from 2007) from 2006) 2009, the firm showed
1.87% the largest increase over
increase the past four years.
from 2007)
Table 2.1: Sainsbury Profitability Ratios 2006-2009
Source: London Stock Exchange (2009)/Researcher (2009)
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 GPM 4.
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

Ratio increased by 0.21
Current Ratio 0.66 : 1 0.71 : 1 0.80 : 1 0.59 : 1 from 2006-2007, but
 Industry – from 2007-2009 it
0.70 : 1 decreased slowly.
Figures are in line with
industry figure.

Quick Acid Test 0.31 : 1 0.40 : 1 0.50 : 1 0.68 : 1 Sainsbury experienced a

 Industry – downward trend from
0.69 : 1 2006-2009 and have
fallen behind the industry
figure.

Shareholder’s 1.27 : 1 1.92 : 1 1.74 : 1 0.98 : 1 Shareholder’s liquidity

Liquidity showed growth from
2006-2007 but declined
in 2009.
Table 2.2: Sainsbury Liquidity Ratios 2006-2009
Source: London Stock Exchange (2009)/Researcher (2009)

2.2.1 Current Ratio

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

The ability of Sainsbury
Debtor Days 4 4 4 49 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.

In 2006, Sainsbury took

Creditor Days 60 56 62 114 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.

Table 2.3: Sainsbury Efficiency/Activity Ratios 2006-2009

Source: London Stock Exchange (2009)/Researcher (2009)

2.3.1 Debtor Days

Sainsbury has a relatively stable debtor payment period of only four days
before, during and after the downturn. This indicates that they are adhering to
policies in place to recover their debts at a cash strapped time when debtors
may not have funds to make payments. However, being a supermarket, most
of their sales are in cash which is the rationale of a high debtor payment
figure.

2.3.2 Creditor Days

The creditor days ratio reveals that Sainsbury obtains payment from their
debtors before paying their creditors. During the downturn, their payments to
suppliers were not affected because they had sufficient cash to finance
themselves by utilising cash received from their debtors. One can assume
that their creditors are very lenient given that Sainsbury is moderately liquid;
they recover debts quickly but take approximately two months to pay
suppliers.

2.3.3 Stock Turnover

 Stock turnover is approximately fourteen days which is still slightly high
because of the life-span foods and vegetables have to remain fresh. This
means that stock needs to be rotated very often. Nonetheless, Sainsbury also
stock household and domestic items which remains a long while to be rotated.

2.4 Investment Ratio Analysis

2009 2008 2007 2006 Remarks

From 2006-2007, there
Earnings per 16.60 19.10 19.20 3.80 was a 20% increase in
share (EPS) (Decreased (Decreased (Increased EPS. From 2007-2008
by 2.50% by 0.10% by 15.40% there was 10 pence
from 2007 from 2007) from 2006) margin between the
and 2.6% figures. It decreased in
from 2007)
2009 by 2.50%

Diluted Earnings 16.40 18.60 18.90 3.80 DPS remained

per share (Decreased (Decreased (Increased moderately stable during
by 2.20% by 0.30% by 15.10% the downturn but
from 2008 from 2007) from 2006)
and 2.50%
decreased slightly by
from 2007 2.20%

Beta Ratio - 0.73 0.55 0.78 Beta ratio showed a

(Increased (Decreased slight decrease in 2007
by 0.18% by 0.28% but increased by a mere
from 2007) from 2006) 0.18% in 2008.
Table 2.4: Sainsbury Investment Ratios 2006-2009
Source: London Stock Exchange (2009)/Researcher (2009)

2.4.1 Earnings per Share

EPS fell by 10 pence during the downturn and declined further by 26% in
2009, shareholders therefore received a lower rate per share in 2008-2009.
However, balance sheet and cash flow statements reveal that shareholders
are investing by acquiring properties to access more space for future
expansion.

2.4.2 Diluted Earnings per Share

DPS slightly declined by the same rate as EPS from 2008-2009. This is not a
major concern for Sainsbury presently, since it shows that shareholders are
 willing to forego some of their personal wealth to ensure the business remains
profitable.

2.4.3 Beta Ratio

Beta figures illustrates that shares are less volatile than the market since it
remains at less than one. In 2008, beta ratio increased a little due to market
conditions but remained under a benchmark figure of one.

2.5 Gearing Ratio Analysis

Maclaney and Atril (2002, p.197) stated, ‘Gearing is the relationship between
the amount financed by the owners of the business and the amount
contributed by outsiders’. Table

2009 2008 2007 2006 Remarks

Gearing 34.75 30.85 36.16 38.48 Gearing figures showed
(Increased (Decreased (Decreased a downward trend from
by 3.90% by 5.31% by 2.3% 2006-2008 but recovered
from 2008) from 2007 from 2006) slightly in 2009 from
and 7.63% 2008.
from 2006)
Table 2.5: Sainsbury Gearing Ratios 2006-2009
Source: London Stock Exchange (2009)/Researcher (2009)

2.5.1 Gearing Ratio

The gearing ratio increased by 11% from 2008-2009 indicating that risks are
increasing due to the changes that were made to survive the economic
slowdown. Interest rates decreased considerably causing imports to be more
costly and the gearing ratio to increase due to market volatility.
2.6 Limitations of Ratio Analysis

In analysing and evaluating Sainsbury ratios there were a few limitations6.

2.6.1 Information Issues

During the downturn the ratios may not reflect the true overview of the
company. The ratios can supply some information to Sainsbury performance
or financial position but when used alone, it cannot suggest whether
performance was good or poor.

Additionally, information in the financial statements can be outdated during

the year depending on when the financial year ends. It may not indicate the
current financial status of the company especially before or during a
downturn. Sometimes, at the end of the financial year, it may not present a
true reflection of the overall year’s performance.

2.6.2 Accounting Issues

The business can use creative accounting to indicate enhanced performance

which can be misleading to the users. Window-dressing can occur to improve
current and quick ratios to make balance sheet and cash flow statement look
better.

3. ANALYSIS AND EVALUATION OF SAINSBURY FINANCIAL MARKET

Sainsbury operates in a highly competitive market. The UK supermarket

industry is mainly dominated by four major supermarkets – Tesco, Asda,
Sainsbury and Morrisons. Together they control approximately 75% of the

6
Limitation of Ratio Analysis, www.cbdd.wsu.edu/kewlcontent/
UK’s market share according to Figure 3 below7. The industry is mature and
flat because growth is difficult, the market leaders are pursuing a low cost
strategy and consumers are benefiting and increasingly demanding. Intense
competition has accelerated resulting in the market leaders to become highly
innovative to build market share by focusing on value, price and advertising
while reinforcing excellent customer service.

17% 15.90%

Sainsbury
Tesco
Morrisons

11.10% Asda

31.60%

Fig. 3: Market Share of the Too Four Supermarkets in the UK

Source: www.marketresearch.co.uk

3.1 Developments in the UK’s Financial Market

From 2008-2009 there were many changes occurring in the UK’s economy
during the recession which is explained below.

3.1.1 The UK Labour Market

The UK labour market was affected by the credit crisis. This created a chain
reaction and unemployment began to increase from May to August, 2008 as
illustrated in Figure 3.1.1. It rose by 164,000 which is the largest increase
7
www.marketresearch.co.uk
since 19908. The unemployment rate was 5.8% for the three months to
September, 2008. This means that there was decreased disposable income
as families have to now curb their spending.

Fig. 3.1.1: UK Unemployment rate July 2008 - July 2009

Source: Adapted from http://www.economicshelp.org/blog/economics/uk-
economy-2009/

3.1.2 Disposable Income

The annual rate of growth in average earnings excluding bonuses was 3.6%
in the three months to September 20089. According to ONS, with earnings
growth on a downward trend due to the weakening labour market and inflation
rising, the squeeze on families’ real disposable income continued.

3.1.3 Inflation

According to National Statistics Online10, Consumer Prices Index (CPI) annual

inflation rate was 4.5% in October, 2008. The largest downward pressure on

8
Weekly Economic Briefing (2008)
9
Office of National Statistics Online (2008).
10
www.statistics.gov.uk
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 2008

Source: 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.

11
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 2008
Source: 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

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
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
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.

14
www.fooddeserts.org/images/supshare.htm
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 – triggered by the sharp fall in the price
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.
SOCIAL FACTORS
• Lifestyle Changes – People are
purchasing healthy foods and are
being more health conscious.
• 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.
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.
Table 3.2: PESTEL Analysis of the UK Supermarket Industry 2008-2009
Source: www.marketresearch.co.uk
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,
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.
TECHNOLOGICAL FACTORS
• Increase in Technology – New
technologies can make service more
convenient and increases customer
satisfaction, leading to a competitive
advantage and increase in sales.
LEGAL FACTORS
• Foreign trade restrictions – Imports
attract taxes and tariffs making goods
more expensive. Customers may
then demand substitutes.
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, Household budgets were clearly under pressure from the
rise in food inflation and effects of the downturn. Sainsbury had to slash the cost of
decrease in disposable essentials and basic products as customers faced the biggest
income. 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 Sainsbury benefited from decreased interest and CPI inflation
decreased CPI annual rates as more customers were able to take advantage of
inflation rate. 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
4. ‘WHAT IF’ ANALYSIS OF SAINSBURY

REFERENCES

Sainsbury Annual Report, 2008. [Online]

Available from: http://www.j-sainsbury.co.uk
[cited 14 October, 2009].

Company Profile for Sainsbury Plc, 2009. [Online]

Available from: http://www.

ONS 2009. [Online]

Available from: http://www.ons.gov.uk
[cited 14 October, 2009].

UK Pound Sterling Exchange Rate. [Online]

http://www.economywatch.com/exchange-rate/uk-pound-sterling.html

BIBLIOGRAPHY

Maclaney, E and Atrill, P. 2002. Accounting: An Introduction. 2nd ed. London:

Prentice Hall.

Robinson, T.R et. al. 2009. International Financial Statement Analysis. 10th
ed. New Jersey: John Wiley & Sons Inc.