Sainsbury's warns of squeeze on household spending

The Argos acquisition has boosted Sainsbury's

The grocer, which is the UK’s second biggest behind Tesco, said it is facing falling consumer confidence as price hikes start to bite after it suffered its third straight year of falling profits.

Sainsbury’s reported an 8.2 per cent drop in bottom line profits to £503m for the year to March 11, while underlying profits fell for the third year in a row, down 1 per cent to £581m.

Chief executive Mike Coupe said Sainsbury’s had done a “remarkable” job after the Brexit vote to mitigate cost pressures.

“Growth in household disposable income has started to slow,” he said.

“People defer things they don’t need to buy - holidays, going out to eat and big ticket items. We have not seen that happen yet.”

Sainsbury’s said profits were knocked back as it sought to keep prices low amid cost pressures from the Brexit-hit pound and higher staff wages.

This was partly offset by a £77m boost from the recently bought Argos chain, which it bought last year when it took over Home Retail Group for £1.4bn.

Sainsbury’s is forecasting cost price inflation of 2 to 3 per cent over the financial year ahead.

While this is providing a welcome boost for under-pressure food sales, it said general merchandise and clothing sales growth have been impacted by reduced consumer confidence and a marked slowdown in real pay growth.

It said the grocery market remains competitive and the impact of cost price pressures remains uncertain, with like-for-like supermarket sales down 0.6 per cent over the year.

Its core supermarkets saw sales fall by nearly 2 per cent, while convenience store sales rose 6 per cent and online groceries increased 8 per cent.

Sainsbury’s said it made cost savings of £130m as part of a three-year target to cut £500m by the end of 2017/18. It also outlined aims to slash costs by another £500m in the next three years.

But the higher costs, together with seasonal losses expected from Argos, are expected to see first-half profits in the new financial year come in lower than the second half. Mr Coupe said the group’s food business remains resilient in a challenging market.

Group sales jumped 12.7 per cent thanks to a robust contribution over the final six months from the Argos business, which reported a 4.1 per cent sales rise.