More pain to come, warns Sainsbury’s as it unveils £150m price cuts

Sainsbury’s is to fight back by investing £150m in lowering prices, cancelling plans to build new stores and cutting its dividend. Plans to build an additional 40 stores have been scrapped.

Sainsbury’s, once the darling of the sector, has been hit by the rising popularity of German discounters Aldi and Lidl and has reported falling like-for-like sales over the last three quarters.

The group is hoping to regain ground from the discounters with the launch of a new joint venture with Danish discounter Netto, which will see it build 15 stores in the North of England on Asda and Morrisons’ home turf.

Sainsbury’s new chief executive Mike Coupe said: “We are facing a once-in-a-generation combination of cyclical and structural change in the industry.”

Sainsbury’s admitted that only 75 per cent of its supermarkets are in the right location and the right size. This means that over 100 stores are not in the right place and are expected to have under-utilised space which can be filled with concessions.

Sainsbury’s reported a statutory pre-tax loss of £290m for the six months to September 27, following exceptional charges of £665m including a one-off £628m impairment charge on existing store values.

Underlying pre-tax profits fell 6.3 per cent to £375m after a 2.1 per cent fall in like-for-like sales.

The convenience business reported a 17 per cent increase in sales to over £1bn and online groceries reported a nine per cent improvement.

Sainsbury’s price cuts are to be financed by cost savings of £500m over the next three years and a reduction in capital expenditure, which is expected to fall from £888m last year to £500m to £550m over the next three years.

Despite this the group announced plans to improve the quality of 3,000 own-brand products.

Sainsbury’s kept its interim dividend at 5.0p, but said its full year dividend is likely to be lower than last year’s 17.3p.

The grocer does plan to open 500,000 square feet of space in each of the next two years, followed by 350,000 square feet in 2017-18. This is down from the 750,000 square feet for 2014-15.

Over half of its new space will be convenience stores as the firm aims to open 100 smaller stores per year. It currently has 594 supermarkets and 660 convenience stores.

Analysts said the challenges facing Sainsbury’s are nowhere near as serious as those at market leader Tesco.

Tesco, which is embroiled in a £263m accounting scandal, has been underperforming far longer than Sainsbury’s.

Tesco is also saddled with a large number of big out-of-town supermarkets, which have fallen out of favour with shoppers who have switched from the weekly shop to regular top-ups and online shopping.