Performance Evaluation of Sainsbury's

Topics: Financial ratios, Generally Accepted Accounting Principles, Profit Pages: 8 (2625 words) Published: August 11, 2010
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 strength of 150,000 staff. It floated itself in 1973 under London Stock Exchange in 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 strength 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 large number of customers who do not want to spend a lot. Significant presence in the UK market is also strength of the company. They currently own 16% of the whole UK market having 18 million customer turn up each week. Poor IT infrastructure is indeed, Sainsbury’s one of the weaknesses. The company had to compensate each of the 10,000 customers with £10 voucher who could not browse their online store for two days due to 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 50 new stores in the convenience store segment. High amount of competition amongst the rivals is the biggest threat for Sainsbury’s. Although they are practising ‘good, better, best’ price design but some low pricing super markets, 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 conglomerate 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 (Appendix-2). These figures indicates that the company is able to pay its 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 amount of current assets. According to the Chief Finance Officer in the annual report of 2009, a 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. Company’s strategy to maintain the working capital is to do by cash trade and also by improving stock days. The stock turnovers (days) for Sainsbury’s (Appendix-2) for 2009, 2008 and 2007 are 14.07, 14.76 and 13.48. Profitability:

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. 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 (Appendix-2) was 5.48, 5.62 and 6.83 accordingly in the...
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