J Sainsbury PLC (LON:SBRY) is back to the drawing board after the UK competition regulator rejected its plans to buy Walmart Inc’s (NYSE:WMT) Asda.
Shares in Sainsbury’s plunged 5% to 215p in reaction to the news as analysts pointed to the absence of a back-up plan to lift the supermarket chain’s sluggish sales.
READ: Sainsbury's and Walmart's Asda abandon merger after competition watchdog rejects deal
“The real worry for Sainsbo’s is what now?,” said Neil Wilson, chief market analyst at Markets.com.
“Sainsbury's is the squeezed middle, losing market share to discounters and simultaneously losing out to more premium brands.”
Sainsbury’s was overtaken by Asda as the UK’s largest supermarket in the latest industry report from Kantar Worldpanel.
Kantar said Sainsbury’s share of the grocery market fell 0.5 percentage points to 15.3% after sales declined 1.8% in the 12 weeks to March 24. In comparison, Asda’s market share dipped by 0.2 ppts to 15.4%.
Aldi and Lidl continued to increase market share, rising 0.7ppts to 8.0% and 0.3ppt to 5.6%, respectively.
While the German discounters have posed a problem for all four of the UK’s biggest supermarkets, Sainsbury’s performance has been particularly poor.
The attention now turns to Sainsbury’s and what it has planned to turnaround the business.
Mike Coupe’s ‘days are numbered without Plan B’
AJ Bell investment director Russ Mould said Sainsbury's has “lost its way” and doesn’t know how to make its proposition stand out in a crowded market.
He said Sainsbury’s chief executive Mike Coupe needs to have a radical Plan B to save the business, otherwise his days are numbered with the supermarket.
“Coupe was caught singing ‘We’re in the Money’ following the initial news that Sainsbury’s planned to merge with Asda,” he said.
“Today you’re more likely to hear Bonnie Tyler blasting down the aisles of Sainsbury’s supermarkets.
“Coupe is holding out for a hero: they’ve got to be strong and they’ve got to be fast otherwise Sainsbury’s problems will just get worse.”
Coupe should be praised for his ambition, ShoreCap says
Analysts at Shore Capital said they are not among those clamouring for Coupe’s departure.
They think Coupe was bold in seeking a merger with Asda and “should be praised” for his ambition and idea generation.
“Additionally, given the poor trading performance of Sainsbury's Supermarkets, the core of the group, it would hardly be helpful to our minds to change the leader at this juncture; the plight of the Tories comes to mind,” the analysts said.
However, the broker maintained a ‘sell’ rating on Sainsbury’s shares, saying the “future is tough” for the company’s core grocery market.
Private equity interest in Asda could add to Sainsbury's woes
Following the Competition and Market Authority’s decision to reject the proposed merger, there are talks Walmart will consider listing Asda separately or try to sell it to a private equity firm.
The Sunday Times reported in February that private equity group KKR was mulling an offer for Asda.
Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, said an acquisition of Asda by another buyer could make matters worse for Sainsbury’s.
She said it would result in Asda becoming “a more active competitor for Sainsbury”.
The analyst added: "Sainsbury’s position in the middle of the pack makes for tough going as the supermarket space is a crowded one, and the group faces fierce competition from above and below."
Abandoned merger to steal spotlight from Sainsbury’s full year results
The abandoned merger is likely to overshadow Sainsbury’s full year results on May 1. The key focus will be on any comments Sainsbury’s makes on its outlook and strategic direction.
Analysts at Jefferies expect Sainsbury’s to post a 1.5% fall in like-for-like sales, excluding fuel, for the fourth quarter after a 1.1% decline in the third quarter.
“The underlying -1.1% LFL reflects much weaker grocery sales (-0.8% total in Q4), offsetting improved gm sales (total +0.5%) and a weather-induced recovery in clothing (at +1.5%),” they said.
“Inevitably, the focus will be on outlook tone for the year ahead, given the extent to which SBRY's sales lag is starting to look well entrenched.”
For the year, Jefferies forecasts total sales of £28.8bn, compared to £28.5bn in 2018, with retail sales up 1.1% to £28.2bn. The investment bank predicts group earnings (EBIT) of £703mln, up from £694mln last year.