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. 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. Furthermore, an analysis and evaluation of developments in the supermarket industry will be done for the years 2008 and

TABLE OF CONTENTS
1 1.1 1.2 2 SAINSBURY OVERVIEW Sainsbury Accounts Sainsbury Financial Tools SAINSBURY RATIO ANALYSIS 1 1 1

1.

SAINSBURYS OVERVIEW

Sainsbury is the UKs 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
1 2

2009 (m)

2008 (m)

2007 (m)

2006 (m)

Sainsbury Online www.j-sainsbury.co.uk 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 Gross Profit Total Operating Income BALANCE SHEET Goodwill Stocks
Cash & Equivalent

18,911 1,036 18,968 2009 (m) 114 689 627 1591

17,837 1,002 17,867 2008 (m) 114 681 719 1610

17,151 1,172 17,168 2007 (m) 112 590 1128 1915

16,061 1,067 16,062 2006 (m) 109 576 1080 3845

Total Current 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 businesss 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 Sainsburys 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 (%)
Gross Profit Margin (GPM) Industry 3.53%

2008 (%) 5.62

(1.21% decrease from 2007)

2007 (%) 6.83

(.19% increase from 2006)

2006 (%) 6.64

Remarks
GPM increased from 2006 to 2007 by 0.19%. In 2008, it fell by a margin of 1.21% from 2007. GPM in 2009 continued to fall in small figures. NPM increased by 1.60% from 2006 to 2007. During the downturn in 2008, it fell by only 0.06% from 2007. However, it increased by 0.53% in 2009. ROCE almost tripled from 2006 to 2007. In 2008, it fell by 0.53%. In 2009, the firm showed the largest increase over the past four years.

5.48
(0.14% decrease from 2008, 1.35% decrease from 2007

Net Profit Margin (NPM) Industry 0.92%

3.56
(0.59% increase from 2008, 0.53% increase from 2006)

2.97
(0.06% decrease from 2007)

3.03
(1.60% increase from 2006)

1.43

Return on Capital Employed (ROCE)

9.46
(2.40% increase from 2008, 1.87% increase from 2007)

7.06
(0.53% decrease from 2007)

7.59
(4.70% increase from 2006)

2.89

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

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 companys ability to meet short-term obligations. Sainsbury liquidity ratio analysis is illustrated in Table 2.2 below. 2009
Current Ratio Industry 0.70 : 1 0.66 : 1

2008
0.71 : 1

2007
0.80 : 1

2006
0.59 : 1

Remarks
Ratio increased by 0.21 from 2006-2007, but from 2007-2009 it decreased slowly. Figures are in line with industry figure. Sainsbury experienced a downward trend from 2006-2009 and have fallen behind the industry figure. Shareholders liquidity showed growth from 2006-2007 but declined in 2009.

Quick Acid Test Industry 0.69 : 1

0.31 : 1

0.40 : 1

0.50 : 1

0.68 : 1

Shareholders Liquidity

1.27 : 1

1.92 : 1

1.74 : 1

0.98 : 1

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 Shareholders Liquidity Shareholders 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
Debtor Days 4

2008
4

2007
4

2006
49

Remarks
The ability of Sainsbury to recover debts improved tremendously

Refer to subheading 2.3.1 on Page

from 2006. However, from 2007-2009 the debtor payment figure remained constant. Creditor Days 62 In 2006, Sainsbury took a long time to repay their suppliers. From 20072009 their payment period to suppliers were shortened from 4 months to 2 months. Stock turnover has remained relatively stable during the downturn.

60

56

114

Stock Turnover

14

15

13

53

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

19.10
(Decreased by 0.10% from 2007)

2007
19.20
(Increased by 15.40% from 2006)

2006
3.80

Remarks
From 2006-2007, there was a 20% increase in EPS. From 2007-2008 there was 10 pence margin between the figures. It decreased in 2009 by 2.50% DPS remained moderately stable during the downturn but decreased slightly by 2.20% Beta ratio showed a slight decrease in 2007 but increased by a mere 0.18% in 2008.

Earnings per share (EPS)

16.60
(Decreased by 2.50% from 2007 and 2.6% from 2007)

Diluted Earnings per share

16.40
(Decreased by 2.20% from 2008 and 2.50% from 2007

18.60
(Decreased by 0.30% from 2007)

18.90
(Increased by 15.10% from 2006)

3.80

Beta Ratio

0.73
(Increased by 0.18% from 2007)

0.55 (Decreased
by 0.28% from 2006)

0.78

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
Gearing 34.75
(Increased by 3.90% from 2008)

2008
30.85
(Decreased by 5.31% from 2007 and 7.63% from 2006)

2007
36.16
(Decreased by 2.3% from 2006)

2006
38.48

Remarks
Gearing figures showed a downward trend from 2006-2008 but recovered slightly in 2009 from 2008.

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 years 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/

UKs 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 UKs Financial Market

From 2008-2009 there were many changes occurring in the UKs 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/ukeconomy-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 9

Weekly Economic Briefing (2008) 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/ukeconomy-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 UKs 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/ukeconomy-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 UKs 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

ECONOMIC 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 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.

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, triggered by the sharp fall in the price 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.

SOCIAL FACTORS TECHNOLOGICAL FACTORS

Lifestyle Changes People are purchasing healthy foods and are being more health conscious.

During the downturn, more people are starting to prepare homecooked meals; a change in trend from eating out which is expensive due to food inflation. ENVIRONMENTAL 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

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.

Foreign trade restrictions Imports attract taxes and tariffs making goods more expensive. Customers may then demand substitutes.

Table 3.2: PESTEL Analysis of the UK Supermarket Industry 2008-2009 Source: www.marketresearch.co.uk

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 Increase in unemployment, rise in food inflation and decrease in disposable income. CHANGES MADE TO ADAPT Household budgets were clearly under pressure from the effects of the downturn. Sainsbury had to slash the cost of essentials and basic products as customers faced the biggest 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. Sainsbury benefited from decreased interest and CPI inflation rates as more customers were able to take advantage of lower borrowing. Sainsbury took advantage of this by lowering prices, and intensified marketing of their cheaper own label goods. As the economy dipped, more people chose to prepare homecooked 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. 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 Sainsburys 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.

Decreased Interest rate and decreased CPI annual inflation rate.

Lifestyle changes

Competitive rivalry, customer loyalty

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.