Growing supermarket space
New space growth opportunities are being developed as part of the plans outlined in May 2007. Half the targeted new space growth is set to come from new stores with the balance from extensions. Total new space will be split equally across food and non-food ranges enabling the continued development of a great food offer via expanded food halls as well as growing total non-food space. Over the three years from March 2007 to March 2010, more than 12 per cent gross new space will have opened compared to the original plan for ten per cent growth, for the same planned capital expenditure of £2.5 billion and with a higher proportion of freehold ownership than originally expected.
During the year, 13 supermarkets opened, two of which were replacements and a further 13 were refurbished. Twenty-one were extended during the year bringing total extensions over the last three years to 54. Total gross new space was over four per cent comprising two per cent from new stores and two per cent from extensions. We successfully operate a range of store formats and we are now opening and extending existing sites to create stores over 80,000 sq ft. In October 2008, we opened our largest new store in eight years in Milton Keynes, Buckinghamshire. At 60,000 sq ft this store provides customers with a full range of food and non-food products. In November 2008 the Hayes, Middlesex store became our first store over two floors and our largest extension having more than doubled in size from 34,000 sq ft to 82,000 sq ft.
In 2009/10 we expect to achieve gross new space growth of over five per cent, including the acquisition of 24 stores from the Co-operative Group. These are an excellent addition to the Company’s store portfolio being mainly in the west of England, Wales and Scotland where Sainsbury’s is less well represented. An extra 500,000 customers will now have a Sainsbury’s store within a ten-minute drive. Nineteen of these stores are expected to operate as supermarkets.
The environment for growing space is changing as opportunities to acquire land for development and new stores are becoming more available and at more attractive rates than in recent years. We have increased our hurdle rates for property investments and have also developed our ability to deliver larger, more cost-effective store extensions and lower-cost new stores. We will seek to take full advantage of the unique opportunities available at the current time to acquire land and existing sites while ensuring we maintain a broadly stable debt position. Capital plans are flexible and constantly reviewed to target expenditure for the best long-term returns.
Active property management
We believe that ownership of our property assets enables us to retain operational flexibility while exploiting potential development opportunities and maximising value for shareholders. The proportion of freehold or long-leasehold property has increased and is now at 65 per cent, including half the space of 50 per cent owned joint venture properties. We have a significant portfolio of properties with development potential. In addition to 297 freehold and long leasehold properties, the majority of which can be extended, there are 43 properties within joint venture (“JV”) arrangements.
Sainsbury’s has two strategic property JVs. The first with Land Securities, formed in November 2007, brings together undeveloped properties and development expertise. One property was added to the JV during the year and it now comprises five properties planned for future mixed use development. In March 2008, we created a JV with British Land to unlock the significant opportunity to develop a number of our most important stores and deliver an improved customer offer. The JV comprises 38 Sainsbury’s supermarkets with 25 earmarked for development. One year on, of these 25, two extensions adding 30,000 sq ft have already been completed and ten further projects are now going through the planning consent process. These will deliver around 260,000 sq ft of additional space in the next few years. We will benefit from the enhanced trading performance of the extensions as well as retaining a share of the increased property value.
The strategy is broadly cash neutral with mature assets sold to fund development opportunities. During the year a number of key leasehold sites, in addition to the 38 sites within the British Land JV, have been acquired for development at a total investment cost of £392 million. This investment was funded by the disposal of mature assets through sales and leaseback transactions (including eight supermarkets) for £393 million resulting in a profit of £57 million.
Corporate responsibility
With over 18 million customers each week, Sainsbury’s has a real impact on UK consumers. Five principles underpin activities. As a leading food retailer we focus on being the ‘best for food and health’ which is why we are committed to ‘sourcing with integrity’. Because we source from all over the world and sell in the UK we have to show ‘respect for our environment’ and play an active role in the communities we serve ‘making a positive difference to our community’. All this is possible through the commitment of our colleagues so that Sainsbury’s is ‘a great place to work’.
A more comprehensive account of our approach to corporate responsibility can be found on this page.
Succession planning for role of Chairman
Led by senior independent director John McAdam, the Company is currently conducting a search for a new chairman and will announce the outcome of this process in due course.
Competition Commission (“CC”)
We welcomed the CC’s finding in its report published in 2008 that the UK groceries market is ‘delivering a good deal for consumers’. This is consistent with the significant improvements our customers have experienced in product quality, availability, service and price over recent years. We are playing a full part in continuing discussions with the CC and other parties, to ensure remedies are implemented in the most effective and efficient way to maintain choice and value for UK consumers. In April 2009, the CC published its formal undertaking for the appointment of an Ombudsman. We continue to believe the creation of this new role to undertake investigations and arbitrate disputes between suppliers and grocery retailers will introduce additional, unnecessary bureaucracy and cost, will increase the burden and disruption to retailers and will not be in the best interests of consumers.
Office of Fair Trading (“OFT”)
In April 2008 the OFT started an investigation involving suppliers and supermarkets including Sainsbury’s on the basis that it had reasonable grounds to suspect co-ordination of retail prices. Sainsbury’s has strict guidelines for compliance with competition law and is co-operating with the OFT in these enquiries.
Outlook
Sainsbury’s is performing well and has identified significant opportunities for future growth in all its five areas of focus. Our progress in the past four years has made us a stronger business and we now serve over 18 million customers a week with great product at fair prices. Sainsbury’s universal appeal gives customers the flexibility to change what they buy rather than where they shop, helping them offset the current constraints on household budgets. We expect the current economic environment to remain challenging but we are well positioned to continue our good progress.