Sales growth slows at Sainsbury's

Falling inflation will lower headline sales figures across the industry, says King

Sainsbury's posted a slowdown in second-quarter sales yesterday as chief executive Justin King warned that falling inflation will force down sales growth across the sector over the coming months. However, Mr King vehemently denied that the grocer's underlying sales had fallen behind those of Tesco since the end of August, as its rival claimed on Tuesday.

Sainsbury's posted like-for-like sales, excluding fuel and adjusted for VAT, up by 5.4 per cent for the 16 weeks to 3 October, but this was down from the 7.8 per cent gain in the previous quarter. Mr King cited tumbling inflation for the slowdown and said: "For the next three to six months there will be little or no inflation in food [in the market]." Both Asda and Morrisons have also cited falling inflation for a marginal slowdown in recent sales. But Tesco's sales are likely to receive a boost from a £350m investment in its ClubCard loyalty scheme since May.

Tesco posted like-for-like UK sales, excluding fuel and adjusted for VAT, up by 3.1 per cent in the second quarter to 29 August. Jonathan Pritchard, the analyst at Oriel Securities, said: "The balance of probability is that Tesco will overtake Sainsbury's in like-for-like terms in the third quarter." Sainsbury's said its overall inflation was now "negligible", adding that there was now "deflation" in most fruit and vegetable categories. For instance, the 792-store grocer said that loose baking potatoes priced at £1.24 per kilo were 10 per cent lower than last year, while bunched spring onions were down by 14 per cent to 55p.

Mr King said that customers were "feeling a little bit bouncier" than six months ago and were buying "slightly more indulgent food". This has helped hold up sales of the Taste the Difference premium range. Sainsbury's said Taste the Difference wine was up by 50 per cent over the quarter, while its premium ranges had driven an overall 25 per cent rise in ready meals. Mr King said that sales of organics were still declining, but at a much slower pace than a year ago. Sainsbury's also said that non-food was growing at nearly three times the rate of food. Over the quarter, total sales at Sainsbury's rose by 3.2 per cent, and 6.8 per cent excluding fuel. The grocer is now processing 18.5 million transactions a week, a rise of 800,000 over the year.

On the economy, Mr King said the UK was on track for two better quarters, but remained cautious about the outlook for the retail sector for next year. He said: "There are, quite clearly, a number of uncertainties, not least of which is the election and uncertainty, therefore, over which political party will be in charge. But we also have VAT going up in January, which feels like a certainty – the Government has been clear that it will, and it feels pretty certain that taxes will go up as well.

"And we all know that unemployment is a sort of lagging indicator, so even if the economy comes out of recession technically, it's very likely that job losses will continue for a while."

Unlike Tesco, Mr King said Sainsbury's had "no plans" to offer full banking services or current accounts. Sainsbury's Bank, the grocer's joint venture with Lloyds Banking Group, delivered a post-tax profit of just £4m in 2008-09.

In June, Sainsbury's raised £432m through a placing of ordinary shares and an issue of convertible bonds to fund expansion.