The Tigger approach
People on tighter budgets are more concerned about the quality and ethics of what they buy, because their money is more precious, Justin King, Sainsbury’s ebullient chief executive, tells Ben Laurance
Justin King refuses to be gloomy. Other retailers may be moaning like mad about their lot, but King, 46-year-old chief executive of J Sainsbury displays a Tigger-ish enthusiasm for the company’s current performance and its prospects.
‘I don’t think I’m being blasé about the current environment,’ says King. ‘But I feel very strongly that we have this incredible ability to talk ourselves into a hole of our own making. Retailing is an industry that rides on sentiment. When people are feeling positive and bouncy, they do perhaps spend more than is good for them, but the opposite is also true: a lot of the commentary when this downturn started was massively overplaying how serious it was. It was self-serving: people were talking things down to talk down expectations of their own businesses’ performance. To an extent, it becomes a self-fulfilling prophecy.’
Well, hang on. Consumers are being hit by sharp increases in the price of such staples as fuel – and, indeed, in the price of food that Sainsbury’s and its competitors sell in such vast quantities. Mortgages are more expensive than a year ago. The most recent unemployment figures suggest that the number of people out of a job is starting to rise. Isn’t King being just a little bit blasé?
Not at all, he insists. Statistics suggest that food prices have risen by more than 9 per cent since last summer. But food inflation is very ‘lumpy’, says King. ‘Yes, rice is twice the price it was a year ago, but potatoes are 30 per cent cheaper. I could show you a shopping basket of goods that you’d be quite happy to buy to feed your family this week from our top 200-selling lines, and that basket would be 20 per cent cheaper than a year ago.’
In any case, the food inflation statistics are misleading, King reckons. A year ago, around 20 per cent of what Sainsbury’s sold was on price promotions of one sort or another – deals such as three for the price of two, or a bigger packet for the price of a standard one.
Now, the share of Sainsbury’s grocery sales accounted for by goods on price promotions has risen sharply: it is around 30 per cent. But the official statistics don’t pick up the effect that such deals have on total shopping bills. By buying more goods that are on special offer, shoppers have cut the amount that they have to spend. And that factor alone helps explain why the widely touted figure for food inflation – nudging uncomfortably close to 10 per cent – is more than double the figure quoted by Sainsbury and its rivals.
Of course the very fact that shoppers are keener on special offers suggests that they are becoming more price-conscious. And Sainsbury’s has seen a 25 per cent rise in sales of its ‘Basics’ ranges – no-frills lines that are cheaper than both branded goods and the standard Sainsbury’s merchandise. So isn’t that a sign that shoppers are trading down? King says: ‘I hate the word “down-trading”, because it conjures up an image of something that’s not actually happening. What you are seeing is what we refer to as “savvy shopping”. Take the example of pasta, where prices have risen significantly. We are certainly selling more of our cheaper pasta and less of our more expensive pasta. But look at carbohydrates as a whole. We are selling a lot more potatoes. I don’t call that down-trading. That’s savvy shopping.’
One of his tasks when he arrived at Sainsbury’s four-and-a-half years ago was to cut prices of every-day goods such as milk, butter and cornflakes to show that for basic goods – as well as Basics goods – the supermarket wasn’t being undercut by its rivals. ‘I can sit here and say without cracking a smile that we are competitive on bands and on entry price-points,’ he says.
And King points out that, of all the shopping baskets to contain one or more Basics item, around half also contain something from Sainsbury’s ‘Taste the Difference’ range – top-quality goods which are significantly more expensive that run-of-the-mill groceries. Paradoxically, supermarkets can actually do quite well when people feel their budgets are under pressure: they will sacrifice a meal out at a restaurant, but will then pay a bit more on the food that they eat at home instead.
Furthermore, King maintains that even as budgets contract, shoppers remain interested in other aspects of their food, rather than just its price. ‘As people’s budgets become tighter, they are becoming more concerned, not less, about preserving quality and preserving the ethics of what they buy because in a sense the money they are spending becomes more precious,’ he says. ‘Will Fairtrade grow 40 per cent this year as it did last year? No. But people who have already made that decision – to buy organics, Fairtrade, high husbandry meat, for example – are, I think, unlikely to reverse the decision they have already made.’
In any case, it is certainly arguable that the worst of food price inflation is now almost over. Last year’s summer floods had a devastating effect on large parts of British agriculture, which pushed up prices of fresh produce. Take one example: the strawberry fields of Herefordshire were under water and Sainsbury’s was having to import expensive strawberries from the US. Then last autumn, there was a spike in internationally traded agricultural commodities such as grains. ‘The pivotal things now, are, where the oil price goes, and the grain harvest in the northern hemisphere,’ he says. ‘And so far, the signs for grain commodity crops show no reason to think there will be any supply problems this coming autumn.’ The annual food inflation figure is likely to remain high for a while, but once those increases of last autumn drop out of the equation, year-on-year price rises should abate.
But what about longer term? After all, we’re not eating any more than we did a generation ago – in fact in terms of calories per head, we’re eating less. So how can a retailer such as Sainsbury’s continue to grow? King says: ‘For 25 years or so, the reason the food market kept increasing was that people paid for time, they paid for convenience, so they moved from buying raw ingredients to buying some level of preparation. For the last five years or so, what people have been paying for is all the dimensions of quality – Fairtrade, organic and just better-quality ingredients. I’m sure that in the longer-term, the trend will be the same as those we have seen in past four or five years. In developed nations generally, we are fundamentally changing our relationship with food, and that will continue in future generations, with people eating higher and higher quality.’
This view hardly seems to accord with the current mood of the market. The so-called hard discounters such as Aldi, Netto and Lidl are reporting huge sales increases. Asda – which lacks Sainsbury’s reputation for being the middle classes’ mass-market food retailer of choice – says that it is drawing an increasing number of customers from the A and B social groups. And each week seems to bring the announcement of a new, high-profile price-cutting campaign by one or other of the four big food retailers.
Says King: ‘There have always been price wars. The reason I think this one has more visibility is simply because it is cutting with the grain of where the customer is.’
But what about the housing market? Isn’t that putting a squeeze on consumers and making them more cautious? King says: ‘Although a lot is written about house price repossessions and so on, the reality is that today, most people have significant equity in their houses, and even if house prices came off 25 or 30 per cent, that would still be the case for 95 per cent of people.
‘Every individual house repossession is an unmitigated disaster for the people concerned, but there are not a lot of them. Some of the headlines have become separated from reality. Are households under pressure? Yes, they are. But broadly, people are still working, they are still earning, they are still in their houses and able to pay their rent or their mortgage, and they are still able to enjoy most of the things in life they have been enjoying for the last period of time.’
Certainly, there is evidence that some shoppers who were previously prepared to load up their shopping baskets with high-quality merchandise no matter what its price, are becoming more careful about how they spend their money. Look, for example, at the downturn in food sales at Marks & Spencer. But that is a particular case: unlike Sainsbury’s, Asda, Morrisons and Tesco, it doesn’t offer the oft-cited choice of good, better, best – which can be translated as cheap, middling and pricey. The big four food retailers have the flexibility to do that.
Sainsbury’s is among them – which helps explain King’s enthusiasm.
Ben Laurance is former editor of Observer Business and Financial Mail on Sunday. He now works as a freelance journalist