The performance at Marks and Spencer is likely to be the most remarkable among the current round of results from the big high-street retailers and goes a long way to explaining its buoyant share rating.
M&S claims to be unaffected by the predations of the discounters - its sandwiches and value-added recipe products are not in the firing line - but it sensed early on the need to appeal to price-conscious customers. Its 'outstanding value' campaign, launched in September 1992, meant that price levels in the half-year to 23 September were little changed on the same period last year.
Yet UK retailing sales rose by 7 per cent to pounds 2.4bn. Since trading space only expanded by 2 to 3 per cent, this implies that sales volume, store for store, grew by an impressive 4 or 5 per cent.
Whatever has been happening to gross margins - average mark-up appears to have held steady - volume gains on this scale are clearly good for profits. But M&S has achieved these gains with 4 per cent fewer staff.
Helped by having only three months of this year's 5 per cent pay award, these productivity gains have boosted net margins in Marks and Spencer's UK retailing from 10.2 per cent to 11.7 per cent, powering UK profits 23 per cent higher to pounds 280.4m.
Sainsbury also demonstrated the strengths that keep it ahead of the pack. Net margins at Tesco were static, and there is some concern that Argyll may suffer the same fate when it reports interims next month. Productivity gains and squeezing more out at the gross level helped Sainsbury to push margins up from 8.1 to 8.4 per cent.
But even the mighty Sainsbury cannot be immune from the cold winds of competition, and it warns that its price promotion - its biggest and most prolonged - could start to erode gross margins.
It hopes that yet more productivity gains, helped by improved technology, and increased volumes will limit the damage at the operating level. But that could be jeopardised if rivals react to the new campaign, and David Sainsbury, chairman, made it clear yesterday that he intends to remain competitive.
There is little sign in the interim results that Sainsbury has been suffering from the action of rivals such as Asda and Tesco, so the price cuts could be a way of turning the screw on weaker rivals like Gateway and Budgens. That will be a long game, however, and in the meantime further price promotions in the sector - Argyll's Safeway, for example, is likely to react soon - will keep the shares jittery.
The City is expecting the current campaign to squeeze margins and analysts have downgraded their full-year forecasts by about pounds 25m to around pounds 800m, putting the shares on about 12.4 times earnings. That looks cheap compared to the market, but buyers must be prepared for further shocks.
As for M&S, few FT-SE 100 companies not recovering from a setback can boast a 24 per cent increase in underlying earnings or a 13.6 per cent dividend increase. If, as UBS suspects, M&S reaches pounds 870m pre-tax for the year, a price/earnings ratio of 18.5 times is at a 13 per cent premium to the market average and an even greater one to J Sainsbury.
Given the food retailing sector's capacity for nasty surprises, just now it must be safer to go with M&S even if the shares do not offer outstanding value.Reuse content