Sainsbury's boss warns against VAT on food as profits jump

Grocer posts 18.5 per cent uplift in pre-tax profits
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The chief executive of Sainsbury's has warned the next government against imposing Value Added Tax (VAT) on food sales, saying it would hurt some of Britain's poorest people.

Justin King made his remarks yesterday as the supermarket chain said its underlying half-year pre-tax profits had risen by 18.5 per cent to £307m – beating City forecasts.

Last week, Marks and Spencer's executive chairman Sir Stuart Rose raised the possibility of VAT – which will revert to 17.5 per cent on 1 January – being raised to 20 per cent by the next government and even being added to the exempt category of food in order to refill the Treasury's coffers.

But Mr King said introducing VAT on food could have a damaging impact. "On food, and studies have shown this around the world, it acts in a very regressive way," he added. "The poorer you are, the more of your household income you spend on food. I think it would be a bad idea and most governments understand that."

Sainsbury's reported a 5.7 per cent rise in like-for-like sales, excluding fuel and including VAT, for the 28 weeks to 3 October. Total sales, including VAT, jumped by 3.7 per cent to £11.16bn.

The increase was driven by a strong performance in non-food lines, more than 18.5 million weekly transactions and shoppers spending more on average. Mr King said this growth rate was ahead of its forecasts, adding: "We are still growing market share. I think we have been very clear that we don't need anyone else to fail for us to succeed."

Tesco, Asda and Sainsbury's have ramped up their non-food ranges ahead of Christmas and Mr King described the competitive environment as "bouncy and feisty". But he said Sainsbury's was growing its non-food sales at 2.5 times the rate of food sales. The company's general merchandise website, launched in July, will offer 8,000 products by Christmas.

Sainsbury's underlying operating margin rose 15 basis points to 3.28 per cent over the half year, from 3.13 per cent last year, although this was still behind Tesco and Morrisons. Sainsbury's Christmas TV advertising campaign will for the first time remind shoppers to redeem their Nectar loyalty points. Its researchers found there were hundreds of thousands of customers with more than £50 on their cards.

"Customers forget at this time of year they have got these Nectar points," said Mr King. "It is actually reminding them of the opportunity they have to dial out a big chunk of their cost. In truth, it is what more customers do even without the reminder."

Sainsbury's plans to open 50 new stores by March 2011. Mr King said: "Around 40 per cent of the population is not within a 10-minute drive of a Sainsbury's." The grocer has raised £432m to drive its expansion from a shares placing and convertible bond.

The company will pay an interim dividend of 4p – 11 per cent more than last year. Mr King warned that next year would "remain tough"m saying: "It will not be until the second or third quarter of next year that we will know whether it will be a long, slow, steady recovery or a W-shaped recession."