VAT cut just an annoyance for retailers, says Sainsbury's

Shortage of bank lending the real issue, claims King

Sainsbury's has become the latest big retailer to attack the Government's cut in VAT, despite the grocer unveiling a powerful set of third-quarter trading figures yesterday.

Speaking before the Bank of England cut in interest rates to a record low of 1.5 per cent yesterday, Sainsbury's' chief executive, Justin King, warned that the focus on rates was "wrong", when the real issue facing the economy was the shortage of lending by banks. Mr King said Sainsbury's customers had so far largely not benefited from the cuts.

He said that, without the introduction of the VAT cut, Sainsbury's like-for-likes sales would have been up by 4.9 per cent for the quarter to 3 January.

Mr King said the introduction of the VAT cut had been an administrative hassle and an "annoyance" for the grocer. He said: "The evidence is that VAT has not had an impact. It has not stimulated demand and, if that money was available, I would have preferred to see it spent on job creation and measures to improve liquidity."

On Wednesday, Sir Stuart Rose, the chairman of Marks & Spencer, said that the VAT decrease had "not made a material difference to our sales", an opinion echoed by Next's chief executive, Simon Wolfson, the day before.

Rather than interest rates, Mr King said the bigger issue was the dearth of lending in the economy. "It is wrong to focus on the base rates – it is the rate at which they can borrow," he said. "We've not yet seen the full benefit of the previous rate cuts being passed on to customers or small businesses."

He highlighted the difficulty of businesses, including some of Sainsbury's suppliers, in being able to borrow during the credit crunch.

"Our suppliers are saying that what they have to pay to borrow is not the issue. It is that there is no money being lent in the first place," he said.

He added: "The key issue is encouraging prudent borrowing by successful businesses, which clearly means some kind of credit guarantee."

Sainsbury's delivered a buoyant festive trading period, with sales up by 4.5 per cent over the 13 weeks to 3 January. The increase was driven largely by robust non-food sales, a hefty investment in promotions and the continued trend of customers switching to its own-brand and its value lines. The supermarket's Basics lines are growing at more than 40 per cent a year, although they only account for a small proportion of overall sales. Mr King said that Sainsbury's had continued to take market share from Waitrose and M&S.

The grocer is also seeing a growing trend towards more customers cooking their own food during the credit crunch. "We are seeing strong growth in produce [fruit and vegetables] and meat and when we talk to customers they are cooking with it," said Mr King.

Sainsbury's delivered a record day of trade on 23 December, with sales in excess of £140m. Mr King said he expected inflation, which was about 3 per cent in the third-quarter, to continue falling.

In contrast to the massive job cuts unveiled by M&S yesterday, Mr King said Sainsbury's had no plans to cut jobs, adding that it intends to hire about 3,000 new employees this year.

Mr King said Sainsbury's was only interested in a "very small number" of Woolworths stores, citing the poor location of many as one of the reasons that it found itself in trouble.