Sainsbury’s faces renewed scrutiny over its growth strategy next week as investors assess reports of merger talks with Morrisons and the sale of its Argos business, against a backdrop of slowing sales growth and rising cost pressures.
The UK’s second-largest supermarket is due to publish its half-year trading update on Thursday, October 22, and analysts are expected to seek clarity on how it plans to close the gap with market leader Tesco.
Sainsbury’s holds about 15.3 per cent of the UK grocery market, according to Worldpanel data cited in reports, compared with Tesco’s 27.9 per cent. The disparity has fuelled speculation that a merger or acquisition could offer a faster route to greater scale.
Earlier this month, the Financial Times reported that Sainsbury’s had held talks with private equity-backed Morrisons earlier this year. The discussions have ended, according to the report, but have revived questions about whether supermarket consolidation remains part of Sainsbury’s longer-term ambitions.
The group has attempted a major tie-up before. Its proposed £7bn merger with Asda was blocked by competition regulators in 2019 over concerns about the impact on competition and consumers.
Any renewed dealmaking would face similar scrutiny, leaving Sainsbury’s needing to demonstrate that its existing business can deliver growth while protecting profitability.
The sale of Argos marks a separate strategic shift. In July, Sainsbury’s agreed to sell the general merchandise retailer to Swift Partners, a new company involving retail specialists including former Co-operative Group boss Richard Pennycook, for at least £120mn.
The price compares with the £1.4bn Sainsbury’s paid for Argos around a decade ago. Analysts have nevertheless welcomed the move to focus more closely on the core grocery business.
Trading is expected to remain resilient, although growth may moderate as food inflation eases and volumes soften. Barclays forecasts second-quarter sales growth of 2.6 per cent, down from 3.6 per cent in the first quarter, and half-year earnings before interest and tax of about £530mn, up 4 per cent year on year.
Investors will also seek guidance on the effect of renewed inflationary pressure, as conflict in the Middle East threatens to push energy costs higher.
The update will offer an important test of whether Sainsbury’s can sustain growth through its existing operations, or whether further structural changes will be needed to strengthen its position against Tesco.
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