Corporate objectives
Two and a half years ago we outlined our plan to Make Sainsbury’s Great Again (“MSGA”).
Our vision is simple; we are here to serve customers well with a choice of great food at fair prices and, by so doing, to provide shareholders with strong, sustainable financial returns. This has driven everything we have done since we outlined our recovery plan in October 2004.
The plan spans three years to March 2008 and as well as fixing a range of basics – such as product availability, supply chain, IT, and price – we committed to make hundreds of small changes every day to improve our customers’ shopping experience.
To enable us to measure our progress we set some key three-year targets:
The targets we set
- To grow sales (inc VAT ex fuel) by £2.5 billion, with grocery contributing sales of £1.4 billion, non-food products sales of £700 million and convenience stores sales of £400 million
- To invest at least £400 million in improving product quality and our price position relative to competitors and to find annual buying synergies of 100-150 basis points1 to be reinvested in the customer offer
- To deliver operating cost efficiencies of at least £400 million
- To generate neutral underlying cash flow in 2005/06 and positive cash flow thereafter.
These were demanding targets and the business has had to challenge itself in every area in response.
Progress in 2006/07 – What have we achieved so far?
Against these clearly defined key performance indicators we made good progress this year.
- We grew sales (inc VAT ex fuel) by over £1 billion, taking our total sales growth over the past two years of the recovery plan to £1.8 billion and ahead of plan
- The £400 million of investment in the customer offer was completed by December 2006 and additional funds were invested in early 2007, improving product quality and giving us our most competitive price position for many years
- We increased our cost savings target to £440 million following our insourcing of IT in April 2006 and we are on track to deliver this
- We achieved an underlying cash flow positive position earlier than expected – in 2005/06 – so we targeted a cash neutral position in 2006/07 and have again exceeded that target despite increased capital expenditure.
These achievements give us a strong foundation on which to build.
We believe now is the right time to look to the next stage of our recovery and to expand the business to drive growth for the longer term. So we have set ourselves new three-year targets that build on the strong progress we’ve made so far and move us from recovery to growth. As we are tracking ahead of our original MSGA goals, the new three-year targets start in the current financial year, with the first year overlapping with the third and final year of our MSGA recovery plan and run until March 2010.
Whatever we do, we must keep building on and stretching our lead in food. It will always be the number one reason why customers visit our stores. We share our customers’ passion for healthy, safe, fresh and tasty food and will continue to innovate and provide leadership in delivering quality products, sourced with integrity.
At the same time, we want to speed up the development of our complementary non-food offer to give customers a broader shopping experience in our stores. We will follow the same principles of quality, value and innovation as we continue to build our capability and refine our customer offer.
Our focus on driving sales continues with a target to deliver £3.5 billion of additional sales, split two thirds from grocery and one third from non-food ranges, from March 2007 to March 2010. Added to the £1.8 billion of sales growth already delivered, this new target, if achieved, would give a total sales growth of £5.3 billion over the five-year period March 2005 to March 2010.
Delivering great product at fair prices will stay at the heart of our business and we will continue to reinvest buying efficiencies (100-150 bps1 per annum) in price and quality. We will also keep improving our operational efficiency so we can deliver an ever-improving shopping experience for customers. We are on track to achieve our cost saving target of £155 million in the next financial year and have targeted savings thereafter to offset half our operating cost inflation.
Our current store estate provides substantial development opportunities and we plan to extend a further 75 stores by March 2010. We’re also actively seeking and developing a pipeline of new stores. Our target for growing sales space would take our total sales area to over 19 million square feet. That means we must increase our space by ten per cent over the next three years. The new space will be split equally across grocery and non-food ranges. This goal enables us to continue to develop a great food offer while also growing space for non-food ranges.
We’re also extending the reach of the Sainsbury’s brand. We plan to open 30 new supermarkets and 100 convenience stores over the next three years, and to extend our online home delivery service. We have significantly improved this service over the past two years and we will be increasing capacity in areas of high demand, almost doubling the number of stores operating the service from just over 100 at the current time to 200.
The performance of Sainsbury’s Bank has been stabilised and, working with our partner HBOS plc, it now has promising growth opportunities ahead. We are targeting profits of £40 million in the year ending March 2010. Under our new joint venture arrangements we would share half of this after tax.
To support these ambitious expansion plans we expect our total capital expenditure over the next three years to be £2.5 billion, funded by operational cash flows as we invest now for long-term growth and the creation of ongoing value. We expect to be broadly cash flow neutral over the three years.
These are ambitious plans that bring together the improvements we are making in operational efficiency and our customer offer, together with sales growth and the addition of new space.
Sales momentum will build through our expansion and flow through to profit at a percentage rate in the high single digits. As new space matures and our other investments mature there will be a step up in profit conversion in future years.
The company is significantly stronger than it was when we launched our MSGA plan in 2004 and this has provided a firm base for future growth. Customers have become increasingly concerned with eating more healthily as well as the social and ethical consequences of their weekly shop. The Sainsbury’s brand is well positioned and at the forefront of addressing these concerns. We have laid out plans for the next three years and we are confident that these provide Sainsbury’s with substantial opportunity for further development of our business and value creation for our shareholders.
