Sainsburys Supermarket Consumer Analysis

Sainsburys Super trade Consumer AnalysisA super f are grocery is the One-Stop-provider of close all the sidereal day to day basic necessities of each regular consumer in the given market industry. These necessities include the intellectual nourishment items, drinks, toiletries, household farce etc. Hence all you need to run your houses daily. These supermarkets prep are now further developed themselves by providing clothings, shoes etc.One of the leading differentiates in the UK supermarket industry is Sainsburys. J. Sainsbury plc is the parent companionship of Sainsburys Supermarkets Ltd, commonly known as Sainsburys (also Sainsbury and JS) this is the tercet largest chain of super stores in the United Kingdom with a market share of 16.3%. The groups Head Office is located at Holborn in Central capital of the United Kingdom.1.2. Ope rationsFounded in 1869 by John James Sainsbury along with his wife Mary Ann in London and then(prenominal) gradually grew to induce the l argest grocery seller by 1922.The confederacy has a chain of stores with 537 supermarkets and 335 convenience stores, because a match of 872 stores in England, Scotland, Wales and Ireland, including Hypermarkets (super large stores- Sainsburys stores- main plus), Sainsburys Central and Sainsburys local (supermarket and local well-provided stores format main mission). The fellowship has been eyeing the opportunity of expanding its vocation distant the UK. Especially the hyper potential in Asia (especially South East Asia and China). By analyzing Tescos ample conquest in the market outside UK, Sainsburys venture dexterity not be far away.The Sainsburys family has 15% shares of J Sainsbury plc (as of May 2008) The major family shareholder is Lord Sainsbury of Turville holding 5.83% and Lord Sainsbury of Preston Candover who holds almost 3% of the companys shares.It is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index(July 12, 2010http//en.wikipe dia.org/wiki/Sainsburys)In this composition we perplex analyse Sainsburys on the basis of its financial performance withStudying its last 2 days financialsMaking necessary observationsComparing its financial performance with the market leader TescoCommenting on the strengths and weaknesses as interpret through their figures / ratios etc.Calculating the WACC for Sainsburys retentiveness in view the over saturated industry of supermarkets, it was necessary that Sainsburys should venture into something advanced to step-up its profit margins and gives the companys portfolio some diversity.A new project suggesting that Sainsburys should open its Sainsburys Travels and Tours has been discussed and a formal spread over which analyzes the idea and calculates the projects NPV has been approved by the board and given a go ahead.A format for quarterly cross has been suggested for traffic updates of the new project e truly quarter.Market Position.The Sainsburys is the UKs oldest maj or forage retailer with their first store opened in 1869. It strives to keep up with its trusted heritage of gauge with best benefits. The management has a continuous approach path towards work with responsibility. They attempt to provide fresh food and innovate with respect to guests needs. It serves over 18.5 million customers either week. The large stores offer over 30000 products along with completing Non-Food products e.g. the TU clothing range which has over 1 million transactions every week. Along with opposite services, an meshwork base shopping service has also been made available, keeping in purport with the changing extremitys o the customers, to almost 90% of UK households.In 1995, Tesco overtook Sainsburys to become the market leader, and Asda became the second largest in 2003, demoting Sainsburys into third place.(July 12, 2010http//en.wikipedia.org/wiki/Sainsburys)(http//www.j-sainsbury.co.uk/index.asp?pageid=12)2. Sainsbury financial building and Perfo rmanceSainsburys is the 3rd largest UK super market with Tesco and Asda as its closest competitors holding positions as No. 1 and No. 2 respectively. Presently Sainsburys is operating in 872 stores across UK with 150,000 employeesSainsburys closes its financial stratum in the third week of March every year. The tools used are the Income Statement, Balance Sheet, Cash flow statement with the Notes to the Financial Statements.The financial analysis of any company helps determine the financial rest of the company and helps in make decisions and plan future strategy and projects on its basisThe financial figures deliver a reasonable affix in sales. The gross profit showed a decline from 2007 to 2008 besides is again on gain trend in 2009.Balance sheet shows harvest-time in good exit and shares and decrease in the borrowings. This might make up been due to increase in the engross rates.Cash flows show a significant increase in bills in in hand which shows the company is stabl y liquid to handle its operations smoothly. Also the increase is due to sale of its stores.2.1. Comparison with Market Leader Tesco2.1.1. Ratio AnalysisRatio analysis of any company provides very important information regarding the companys financial standing, financial strengths /weaknesses. They are calculated to compare a companys progress against other rivals of the industry as well as its prior performance. The ratios measureThe profitability of the businessThe PerformanceThe quality of companys performanceA companys ability to meet the short term obligationsA companys debt magnetic coreValue of business / Investment2.1.2. ManagementTesco is the market leader in UK supermarket industry holding almost 31% of the market. The 1st Tesco store was opened in 1929, in Edgware, Middlesex, UK. Since then it has gradually grown in to being the largest supermarket chain in the UK with almost 2200 stores in UK with over 285,000 employees. Since the mid 90s S, Tesco has been investing in new markets overseas, finding new opportunities for growth and means of generating long term returns for shareholders. The group operates in 13 markets outside the UK, in Europe, Asia and North America, and also announced their entry into the Indian market last year, where they are be after to establish cash carry business.2.1.3. Financial strengthBoth Sainsbury and Tesco take over strong ratio sheets, equip with tangible real estate assets. This collateral allows them to borrow at lower rates and generate cash through sale-and-leaseback schemes if required.Both the companys are operating in a saturated market.Sainsburys almost 90% of tax income is consumed in COGS leaving from 5% to 6.5% in lieu of gross profit margin and even the other expenses are insignificant comparatively still the company is left with 1.5% to 1.9% of net profit.For Tesco, the situation is not very different from Sainsburys. Here the gross profit margin is 7% which is a little better from Sainsburys.The actual ratios and Quick ratios of both the companys are below 1 which is not a healthy trend. In ordering to obtain any finance the company should deem a stable solvency indicator.The debt ratio indicates that how more than of the firms assets are being financed by the debt. Both the companys show a stable debt ratio of 20% to 30%.The debt to justness ratio measures the risk involved in investing in the particular company. Sainsburys shows an acceptable debt to equity ratio of almost 50% hardly Tesco comparably has a big debt to equity ratio of 91 which might be because of its full throttle expansion in international markets.Most financiers analyze the company balance sheet before making an investment decision. The prime motive to check if the companys capital Gearing is right. Capital Gearing is the relationship between Equity and Debt. It is always considered good for a company to have a reasonable Equity base to a business, as insurance against unexpected losses. This is to minimize the risk as much as possible. If a company has a Gearing of no more than 50% 67% of their Gross Assets from Debt, depending on the risk associated with the business, it is considered acceptable. The higher the gearing, the more vulnerable the company is to the impact of increased interest rates.Tesco and Sainsbury both show a sound gearing and though Sainsbury is more healthier to be invested upon, Tesco as well is well within the Good Gearing GroundsThe interest coverage of both companys show a very healthy standing to meet their interest payments deadlines.http//www.financesoutheast.com/From above comparison it is clear that retail industry is highly saturated and it is nearly impossible for the companies to earn super profits. Effective equal regard techniques need to be applied and monitored on regular basis to improve profitability. Sainsburys have improved disturbance at a rate of 5.5% a year. Profits have grown even faster increasing by 6.7%. Tesco has a litt le edge based on earning slightly higher profits and demonstrate rapid growth. Both the companies need to improve upon their debt structuring, especially Tesco and hence gradually improve their liquidity ratios.2.1.4. branch potentialSo far, Sainsburys has only concentrated on its business in the UK while Tesco has increased its operations in 14 countries. But we should not conclude that Sainsbury is lacking in growth opportunities. Sainsburys has two procural offices in China but again no one is sure as to when Sainsburys allow be able to achieve increased growth and improved profit margin without international expansion.Sainsbury has performed well by adding innovative non-food products and banking services, but competition is tough and increasing in these areas, tooTesco, on the other hand, may have more growth opportunities in progressing Asian market and elsewhere, but its also a much bigger entity than Sainsbury. For example, during last one year Tesco had 56.9 billion in turnover as compared to 19.9 billion for Sainsbury.Sainsburys has been concentrating on UK store expansion rather than overseas growth. It has increased the total do of stores from 583 in 2004 to 872 today. Today, Sainsburys need to mark on its domestic growth and increase its store efficiencies, which is not an easy task, but it is more achievable than managing and controlling a group of international locations with diverse tastes and demands.http//www.tescoplc.com/plc/about_us/strategy/international/http//www.fool.co.uk/news/investing/company-comment/2010/07/16/a-foolish-fracas-sainsbury-vs-tesco.aspx3. Weighted Average Cost of CapitalDebtEquity2,357 (Long term debt)18.64m (shares) * 345 (share price) = 6,4313.1. EquityNo. of shares outstanding 1,864 (m) original market price per share 345Market Value of equity 1,864 * 345 = 6431http//www.google.com/finance?q=LONSBRYhttp//www.digitallook.com/companyresearch/10079/Sainsbury_(J)/share_prices.htmlhttp//www.bloomberg.com/markets/ra tes-bonds/government-bonds/uk/http//www.j-sainsbury.co.uk/index.asp?pageid=23We calculate the cost of equity through Dividend Growth ModelWhich is Ke = Do (1 + g) / (MV-Ex Div) gWhereKe = cost of equityDo = Dividend given = 14.20 (pence)MV = Market appraise = 345 (pence)Ex. Div = Ex Dividend = 10.20 (pence)g = growth rate = 7.6%Cost of equity 14.20(1+0.076) / (345 10.2) 0.076Ke = 12.11%3.2. DebtBook value of Debt 2,1351,074 4.98%861 2.36%171 4.25%251 4.3%Kd = 3.90%http//www.j-sainsbury.co.uk/ar10/downloads/pdf/Sainsburys_AR10_note_20_borrowings.pdf3.3. WACCVKV * KDebt23573.90%9192Equity643112.11%77879Total878887071Sum VK / Sum V = 87071 / 8788 = 9.91%4. jump out4.1. Opening up of Sainsburys Travel and ToursSainsbury has always aimed to be the consumers first choice for food, delivering quality products with great service at a competitive cost. The company is striving to achieve the objective of leading margins with diverse market and delivering strong profits every year.The v alues of Sainsburys are defined in their website asThe values of the Sainsburys fall guy passion for healthy, safe, fresh and tasty food, our focus on delivering great products at fair prices, a story of innovation and leadership and a strong regard for the social, ethical and environmental issues of our operation have continued to stand the test of time.Five principles are at the core of Sainsburys businessThe best for food and healthSourcing with integrityRespect for our environmentMaking a positive difference to our communityA great place to work.These principles provide differentiation from our major competitors and define and direct all our activities.http//www.j-sainsbury.co.uk/index.asp?pageid=14Keeping the tradition of the best services, the management has decided to venture into the ever growing market of Travel and touristry industry with opening up of Sainsburys Travels and Tours.The idea of opening up a Travel Services business branch of Sainsburys is based on the news of Sainsburys opening up its Travel Clinics in mid 2008. The clinics were open up in outlets initially offering free consultation with nurses offering different injections and health products with advise for flock travelling to countries requiring vaccinations and immunization from infections like flu, malaria etc. These products were offered at significantly cheaper prices than in any specialist clinics.http//www. spendlettings.co.uk/resources/industry-news/general-travel/sainsbury-s-launches-travel-clinics-in-21-of-its-supermarkets/a-3-143-1264/The Sainsburys Travels and Tours ordain provide the company to outgo and achieve its strategic goals on the basisThe supermarket industry has become plumb saturated in the UK and at present Sainsburys is eyeing to expand itself in the International market but it pull up stakes be a while before it actually does.The Travel industry is a growing market and has a big potential of growth.The new product will benefit the company earn huge profitability margins which are becoming hard to achieve I the supermarket industry.The Sainsburys has a huge loyal customer base which will be gived for promotions and marketing purpose.The project has a high probability of success given a chance of a fresh new product offered by a supermarket chain.The company will use its quick huge customer base for the travel services marketing and promotion.The quick nectar loyalty card database will help the management to design the product, offerings, travel and tour packages as per the preferences.4.1.1. Project Description and Key ElementsThe project will have a Head Office (With the existing HQ of Sainsburys at Holborn Circus, London) have initially total 3-4 rooms allocated.The HQ office will have 7 employees.initially only limited stores and selected cities will be setup with the Sainsburys Travels and Tour Desk with one somebody behind the counter.The Six major cities (with respect to area / population) i.e. London, Birmingham , Manchester, Glasgow, Belfast and Cardiff covering the whole of UK will be set up initially for kick off of the Travel and Tour Services.10 stores in London and 5 stores in the remaining cities will be setup for providing the services.Each of these cities will have a team of 2 people, 1 within the store premises (as mentioned above) and the other for monitoring and reporting purpose.The number of employees will gradually be increased as per requirements with the project evolvement.http//www.ukcities.co.uk/populations/4.1.2. initial Investment CostInitial InvestmentCostCost of IATA Membership (http//www.iata.org/membership/Pages/fees.aspx)33,500 GPBTotal Staff 27 Computershttp//www1.euro.dell.com/content/products/features.aspx/iip_notebooks?c=ukcs=ukbsdt1l=ens=bsdCID=41142LID=1069631DGC=ST650 * 27 = 17,550 GBP(including VAT and Delivery)Serverhttp//configure.euro.dell.com/dellstore/config.aspx?b=c=ukcs=ukbsdt1l=enoc=PE2T610Rs=bsd2,800 GBP(including VAT and Delivery)Softwarehttp//ww w.britishsoft.co.uk/?gclid=CMmGudvPgaMCFSU_lAodWH6Zdg940 GBP(including VAT and Delivery)Total Initial Cost54,790 GBP4.1.3. Other CostsType of costCost AmountRemarksSalary for 1st year450,000Inc. of 7.5% each yearBrochures / Stationary / Equipment20,000Inc. of 10% each yearMarketing Budget250,000Inc. of 15% every year4.1.4. AssumptionsWe assume that Sainsbury will initially target the high spenders from its customer database and target them for the promotions and marketing materials (leaflets etc.)initially the holiday packages and tours will be offered for 5 big holiday destinations including Egypt, Turkey, Tunisia, Barbados and Spain.The packages the calculations are based include a general deal for 4 people for 7 days.The holiday packages for these destinations cost as follows (based on holiday packages offered by Expedia.Destination damage for Customer (average) http//packageholidays.expedia.co.uk//tt.aspx literal Cost (with Sainsburys profit margin 24 (Price 24%) http//www.th omascookgroup.com/annual-reportsEgypt1150 (GBP) 286.5 GBP per person874 GBPTurkey728 (GBP) 182 GBP Per Person553 GBPTunisia1200 GBP 300 GBP per person912 GBPBarbados3120 GBP 780 GBP per person2371 GBPSpain1000 GBP 250 GBP per person760 GBPWe assume that Sainsbury will succeed on selling on cx of these above mention packages for each country. Annual Revenues will be 718900 GBPWe assume that annual revenues will increase by 12% (2% more than the average growth in Sainsburys revenues which is 9.4% given the growth potential in the industry)Operating cost will include the salaries of the employees, day to day business running expenses etc. since we are sharing the premises of existing Sainsburys stores and HQ so there will be no superfluous operating cost except the salaries.As per the National Statistics Online, the Consumer Price Index (CPI) is at 3.2% and the Retail Price Index (RPI) is at 5.0%. http//www.statistics.gov.uk/cci/nugget.asp?id=19. The growing inflation rates have a direct negative effect on the customers ability to spend on leisure and holidays. Although consumers have gradually developed this sense of prep ahead and saving for their Holidays.Effective Tax rate of 28% is applied. http//www.hmrc.gov.uk/rates/corp.htm4.2. Identification of take chances and uncertaintyIn any new project, one is never sure about 100% results. If the project is based on Risk then we might expect somewhat certain results based on previous data. The cash flows based on Risk might be forecasted and the associated possibilities are also known but in eccentric person of uncertainty the outcome is unknown and hence the related probabilities are also unknown. A study conducted with a few managers showed that they think risk is manageable if you have right information, sufficient friendship about the project, and if the person is experienced in the particular field. Most of them stressed on the importance of alternatives, collect more information and checking differ ent aspects of the problem, along with being actively involved to reduce the risk.. (IAENG International diary of Computer Science, 324, IJCS_32_4_12)It is the attempt to manage both the known-unknowns and unknown-unknowns. Preparation for and managing the risk is the result of what is unsure and unknown-decision risk. 4.2.1. Affects of Risk and Uncertainty on proposed projectLets consider the following aspects while making decision based on risk for the Sainsburys Travels and ToursWhat can go Wrong?The Sainsburys already has an established huge no. of loyal customers who would be happy to have an option o a different kind of service offered from their trust deserving service provider. The expectation for a stable turnover is based on the fact that it is an established name offering a new product on the basis of its goodwill.How likely it is to happen?The expected growth can be effected by increasing inflation rates.The Travel Industry faced a huge blow after 9-11 incident.What ar e the consequences?Any unforeseen incident like this (God forbid) will have long lasting effects on the companys growth, profitability and future expansions and plans.http//www.robustdecisions.com/decision-making-tools/risk-vs-uncertainty.php5. Calculation of NPVNPV is a technique where cash inflows which are expected in comming years are discounted back to their present value. This is calculated by through a discount rate equal to the interest that was to be received on the sums, in case the inflows had been saved, or the interest that has to be borne by the firm on the borrowings. In case of more then one project appraisal, the firm should choose the one that produces the highest NPV.5.1. Sainsburys Travels and Tours Expected Cash Flows (for 3 years)The project has a positive NPV which is a healthy sign for the project. It can be proceeded with. The project is going to be right for the company and add to the shareholders value. A positive NPV means that the project is worthwhile because the cost of tying up the firms capital is compensated for by the cash inflows that result.http//www.bized.co.uk/timeweb/reference/using_experiments.htm6. Quarterly Report FormatAs per the requirement of the board every quarter a report has to be sent for updated performance and progress information. The report has to serve the purpose of giving a complete up to date data to be analyzed by the board. A company analysis gives a complete performance and financial picture of the company. The report should include all the data necessary to quickly compare it with the major competitors.6.1. Reporting LayoutsThe report will be in Excel sheet format.The Information provided will be in different excel sheets in the same document each covering a preceding quarter to give convenient comparisonsTitle of the report Sainsburys Travels and ToursAddressed toDate from -/-/- to -/-/-Date of submissionSubmitted by6.1.1. Holiday Packages Bookings6.1.4. Comparison of Actual and Forecasted perfor manceThe calculation of the Sainsburys Travels and Tours project NPV has been made by going through the three years forecasted figures of the company which show that it is progressing towards a high performing entity with reasonable growth in profit. Although with the growth of the company last it will require to use more resources in term of offices, employees, equipment, marketing budget etc. but the current performance clearly suggests that it will very strongly bear all the changes and keep on showing a steady growth.7. ConclusionSainsburys is one of the key players of the existing supermarket industry in UK. This report gives an overview of its performance during the last couple of years, dealing with the financial figures we have tried to analyze the financial standing and strength and the comparison with the main market leader Tesco gives a fair idea of both the companys approach towards business.Although Sainsburys has not yet ventured into the International market but the step might not b that far away keeping in mind the huge success TESCO has had in the international market.Sainsburys has a huge loyal customer base. The suggested new service product throughSainsburys Travel and Tours will provide these customers to utilize yet another trustworthy service by their trusted name.The growing Travel and Tours market will definitely have a positive effect on the Sainsburys portfolio by increasing its profits and hence strengthening its business.