Sainsbury’s job losses and store closures signal rapid digital change

Profile picture for user ddpreez By Derek du Preez November 5, 2020
Summary:
UK retailer Sainsbury’s announced today that it would be slashing 3,500 jobs and the closure of a number of its Argos stores.

Image of a Sainsbury’s store
(Image sourced via Sainsbury’s website)

UK supermarket retailer Sainsbury's' today announced that it would be cutting approximately 3,500 jobs and that it would also be closing 420 of its standalone Argos stores. These figures will no doubt be shocking for those employed by the brand, but it's important to understand the context behind what is driving this change - the acceleration of changing consumer behaviours in a digital economy, fuelled by the COVID-19 pandemic. 

Prior to the COVID-19 lockdown restrictions consumers were undeniably shifting their buying habits to digital platforms, through the use of a variety of channels including click and collect, buy online pick up in store, and home delivery. However, the rate of change experienced by companies such as Sainsbury's is forcing it to make long-lasting structural decisions in a matter of months, which otherwise may have played out of a number of years. 

The news comes as Sainsbury's announced half-year losses of £137 million, driven by the one off cost associated with the Argos store closures. However, the core underlying figure from the company's half-year results is that digital sales were up a whopping 117 per cent to £5.8 billion, which now accounts for nearly 40% of total sales. 

If you read between the lines of the statement released by Sainsbury's today, the results reflect a rapid transformation occurring within the company, which had already done well in beefing up its digital and omni-channel capabilities in recent years. 

Commenting on the news, Sainsbury's Chief Executive Simon Roberts, said:

COVID-19 has accelerated a number of shifts in our industry. Investments over recent years in digital and technology have laid the foundations for us to flex and adapt quickly as customers needed to shop differently. Around 19 per cent of our sales were digital this time last year and nearly 40 per cent of our sales are digital today.

While we are working hard to help feed the nation through the pandemic, we have also spent time thinking about how we deliver for our customers and our shareholders over the longer term.

Our other brands - Argos, Habitat, Tu, Nectar and Sainsbury's Bank - must deliver for their customers and for our shareholders in their own right. Argos sales have been strong over the past six months and we have gained almost two million new customers as people have re-connected with Argos. Over the next three years we will make Argos a simpler, more efficient and more profitable business while still offering customers great convenience and value and improving availability. 

Roberts added that he hopes to find alternative roles for the majority of the employees impacted by the job losses announcement today. 

The underlying story

As noted above, the headline news today will understandably focus on the job losses and store closures being outlined by Sainsbury's today. However, the other story here is how Sainsbury's as a business is preparing for a primarily digital driven future. 

The background to this, of course, is the growth in online services such as Amazon, which have changed the way that consumers expect to be able to not only purchase their goods, but the flexibility in service that such digital platforms provide. This is evident from the news earlier this year that Sainsbury's would be getting rid of the iconic Argos catalogue, in favour of focusing on its digital platform and logistic efforts. 

Some of the key points worth highlighting from the Sainsbury's results today, which provide evidence of the changes we are likely to see down the line for the company, include: 

  • By March 2024 the company will open up to 150 more Argos stores in Sainsbury's and add 150-200 more Argos collection points in supermarkets and convenience stores, so that every Sainsbury's supermarket will have either an Argos store in store or a collection point

  • It is planning to "transform" its approach to costs across the business, delivering a reduction in our retail operating costs to sales ratio of at least two percentage points by March 2024. Sainsbury's said that this will create at least £600 million of annual additional funding by March 2024 to reinvest in the customer offer and deliver improved financial returns. 

  • Sainsbury's is investing in the integration of its logistics and supply chain network and the accelerated restructuring of the Argos store estate, reducing costs and delivering working capital benefits 

  • Capital expenditure will increase to between £700 million and £750 million per year in the three years to March 2024 to support high returning infrastructure transformation investments before returning to around £600 million per year

On the last point, the Sainsbury's statement notes: 

Capital expenditure will increase over the next three years to fund high-returning logistics and Argos transformation plans. We expect these projects to generate working capital improvements and expect cash generation to remain strong. 

In terms of online growth at Sainsbury's in recent months, the headline figures are: 

  • General merchandise online sales grew by 78%

  • Online clothing sales grew by 75%, despite an overall sales decline of 18.3%

  • Capacity for Sainsbury's online groceries shopping more than doubled since March. 17% of overall grocery sales are now online, compared with just 17% in March. And the company is now fulfilling over 700,000 online customer orders per week across home delivery and click and collect. 

  • Sainsbury's now also has a one hour food delivery service in 15 cities across the UK and has signed deals with Uber Eats and Deliveroo to expand this footprint. 

  • Argos sales grew by nearly 11% in the first half of the year, with 90% of sales originating online. 

In a Statement, Sainsbury's added: 

COVID-19 provided and continues to provide a challenging backdrop for customers and colleagues, but we have a clear mission as we focus on helping feed the nation. We have sought to make the customer journey convenient, whether in store or online, supported by great service from our colleagues across the business. We have invested in our estate to ensure customers and colleagues are able to shop and work safely, through protective measures such as checkout screens, personal protective equipment and increased cleaning. 

We continue to innovate and invest in customer experience through key initiatives such as SmartShop providing customers with scan as you go technology, which is increasingly popular.

My take

What's happening at Sainsbury's is a trend we are seeing across multiple industries and businesses. The changing customer behaviour that has been driven by digital in recent years has been accelerated by the COVID-19 pandemic as more consumers rely on digital tools, meaning that companies are having to make rapid investment decisions to accelerate their own change programmes. The news of store closures and refocusing capital to invest in online tools and logistics is sensible and likely would have happened over time regardless - it's just that what we are seeing now is years worth of change and work happening in a few short months.