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J Sainsbury PLC
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Thank you. Good morning, everyone, and a Happy New Year. And I'd really like to thank you for joining us at short notice this morning to talk about our quarter 3 trading statement covering the 15 weeks to January 2.Now I'm joined this morning, of course, by Kevin O'Byrne, our CFO. I'm going to give a brief summary first. I'm going to refer to the slides that we sent around this morning and which are available on our website. And then, of course, we'll be happy to take all your questions.So just turning to the slides and to begin with, I think it's worth reflecting, obviously, first, this was another extraordinary and challenging trading period, and we played a really strong role in fitting the nation.If I turn to Slide 2, headed quarter 3 and Christmas performance. Our stores were well stocked throughout despite some significant supply chain challenges. We continue to grow online delivery capacity whilst customer satisfaction measures of speed and bringing that to service and product availability were the highest we've ever seen at Christmas. Argos again demonstrated the strength of its digital platform with nearly 90% of its sales starting online during peak.All of this was done through the hard work of all of my colleagues. And I would like to say, again, a huge thank you for all of their tremendous work. It really was an outstanding team effort across every part of the business, given the highly dynamic situation that we saw in the running to Christmas.I and many of the team spent our time out across the business in the fortnight ahead of Christmas itself and saw firsthand the outstanding job our colleagues did in providing the safest shopping environment possible whilst delivering leading service and availability. I believe we delivered really well for our customers this year, and we learned a lot, too, about what worked across our offer and also what we can improve further for next year. The result was like-for-like sales growth of 8.6% for quarter 3 or 9.3% over the more recent 9-week period since the start of the second English national lockdown.This growth and our expectation that sales growth would remain elevated through the period of the lockdown, we have just entered, drives the increase in profit expectations that we've announced this morning.I'm now going to turn to Slide 3, which shows the retail sales growth by category. So clearly on this chart, this shows good progress across the board, clearly reflecting a second lockdown in England and the COVID restrictions more widely, but also very strong execution across our digital platforms; the groceries, Argos and clothing. We've seen continued recovery of general merchandise and clothing sales in Sainsbury's stores with very good seasonal performances from both.We've also referred in today's statement to a strong general merchandise and clothing margin performance driven in part by a significantly higher proportion of full price sales. So this has been profitable growth to us alongside an Argos Black Friday strategy, which traded some sales in favor of a more disciplined promotional stance, as we previously described at the interims.Turning to Slide 4, which specifically focuses on our digital sales. I talked earlier about strong execution across our digital platforms. And you can see here on this slide, digital sales increased by more than 80% over the quarter and accounted for more than 40% of our sales. Argos digital sales increased by 49%, with nearly 90% of the sales starting online, a clear demonstration of Argos's digital capabilities through the peak periods of both Black Friday and Christmas.In grocery, online accounted for 18% of grocery sales, a step on from the 15% we reported for the first half, with 16% of these being Click & Collect, although noticeable that the Click & Collect peaked at 24% in the key Christmas week. We worked hard to continue to increase delivery and Click & Collect capacity despite the challenge of bigger Christmas basket sizes, and we saw a good acceleration in the rate of sales growth ahead of Christmas.Turning to Slides 5 and 6, focusing on the grocery sales performance versus the market. Now in November, we committed to report consistently against a set of metrics, and on Slide 5, we'll show one of these. Our grocery market share, where despite tough comparisons and a very disciplined approach to promotions and other trade driving activity, we grew ahead of the market and outperformed some key competitors.That's reflected in Slide 6, which shows performance over the core food and drink categories, stripping out some of the noise from beers, wines and spirits promotional activity. On this measure, we outperformed all of our key competitors over the quarter.Now I know the eagle-eyed amongst you would have noticed that we're using Kantar value data, where previously, we've shown Nielsen volume data. This is simply because we brought out our statement clearly forward a week and the Nielsen data covering Christmas itself is not yet available.So turning to Slide 7. As much as it's online, it's delivering the big headline growth numbers, more than 80% of our grocery sales still go through our supermarkets. And so I'm really pleased that we have seen some of our strongest-ever customer satisfaction scores, a real tribute to the brilliant job our team have done.We encourage customers to shop early to help reduce capacity challenges on peak days with initiatives like our 10x net-to-point offer, and we invested in more SmartShop handheld scanners to help deliver great availability and service. SmartShop accounted for nearly 30% of sales in handset stores over the quarter. And customers recognize this with great stores for product availability, speed of checkout and availability of colleagues.But at the same time, we've not yet made much progress on value perceptions, and we could have done better in some other areas such as premium products and innovation. Taste the Difference sales were up more than 11% over the period, and we know that others saw stronger growth in premium-owned label, albeit from a smaller base. And we have more to go for in these premium areas as we think about the year ahead.Now turning to Slide 8. This shows that we really stepped up to deliver for customers over Christmas in terms of online capacity. We continue to move with pace, and we'll deliver more than 835,000 online orders this week. We were at 340,000 back in March and 700,000 at the end of quarter 2.Turning to Slide 9. We said in November that the profitability of our groceries online business has stepped up considerably over the first half, and this has continued given strong productivity metrics. We increased capacity beyond our original estimates, largely from the same fixed asset base despite the challenges of peak trading.I'd also like to highlight the progress in van utilization and items picked per hour, in particular, which is now broadly back at the levels achieved ahead of the pandemic. We showed you the chart on the right at the interims, where we were ahead of the pack on online customer satisfaction. Updated for quarter 3, this suggests that our growth might have, in a couple of areas, come slightly at the expense of customer satisfaction, but we're focused on betting down on our new capacity to deliver a consistently strong customer experience.And then moving to Slide 10. And last, but by no means least, I would like to highlight the operational performance at Argos over the peak period, with nearly 90% of sales now starting online and huge growth in Click & Collect and home delivery. This represents very strong execution and a real demonstration of the strength of the Argos platform as we transform the business model.So then on to Slide 11, turning to the year ahead. We still face a lot of external challenges through COVID, and we're expecting a much tougher consumer backdrop. But a focus on the priorities we set out in November will put us in good shape. On food, we have very strong plans on value and innovation that you will start to see in stores very soon. We're well underway with the Argos transformation plan, and the bank is in good shape. Underpinning this, we will need to deliver the significant step-up in our cost savings, and we are executing at pace. We will provide a full update on progress -- on our early progress with our preliminary results in April.And then finally, on Slide 12. I committed to come back to you every time we speak on our key metrics. This time around, I can say that we delivered really encouraging customer satisfaction scores and a solid grocery market share performance. We're in a strong place relative to the recent guidance on profit and cash, and we will come back to these metrics at the time of our preliminary results in April. I'm encouraged by the progress. And as you would expect, our new top team are fully focused on executing our plans for FY '22.So thank you for listening. And I'll now ask that we open the call up for your questions. Thank you.
[Operator Instructions] Your first question today comes from Andrew Gwynn from Exane BNP Paribas.
Happy New Year and starting off in style. So congratulations to you and indeed the team for a good quarter. I guess the questions -- well, they're kind of boilerplate questions really, which I'm sure you anticipate. But profit for next year, I mean, obviously, this year's profit is down substantially year-on-year, albeit better than implied. So if COVID hangs around, which unfortunately, feels like it is going to, what's the right base of profit? Will be it GBP 330 million versus high GBP 500s million? I know you've only given us some guidance on profit for next year. But just wondering on your thoughts if COVID continues to hang around.The second one, unfortunately, online. Some impressive stats there. But obviously 24% Click & Collect just one that particularly jumps out. I'm just wondering what the lessons are as we go into the next year, particularly obviously thinking about the profit journey with online. And connected to that, obviously, your plans for more capacity addition?
Thanks, Andrew. So maybe I'll ask Kevin maybe just to comment on as we look ahead. And then I'll come back and talk about online. Kevin?
Yes. Andrew, sitting here this morning, we wouldn't expect anybody to be moving forecast for next year. Just to be clear, the upgrade today, obviously, is related to specific circumstances. And let's call them pretty unusual circumstances that we've seen in the last period of time and our view of the remaining weeks in this financial year. We reiterated to be at least GBP 586 million for '21, '22 when we last spoke, and that included the extra drag of GBP 30 million of rates, business rates next year. So at the moment, we're focused on closing out this year before we talk in more detail about next year, still a lot to do to manage the rest of this year, and then we'll talk again when we next speak to you about next year.
So just to come back on that. Just -- obviously, if COVID hangs around a bit longer, as it seems to be, should we have it in mind that GBP 580 million could be a little bit lower given some of those COVID costs?
It certainly will bring some plus and minuses, which we'll work through. But at the moment, we have no further update.
Okay. Clear. Sorry, Simon. Go ahead. I'm sorry.
No. Thanks. And just, Andrew, to your questions on online. So I mean just sort of 2 quick recaps and then your questions on looking ahead. And I think sort of the headline point here is 340,000 in March to around 700,000 at the interims to late 835,000 last week, so our absolute focus here is on opening up the capacity as far as we can to meet the demand, obviously, from customers and we'll be going to the third lockdown, not surprisingly, we've seen further demand peak this week.I think the Click & Collect point, as you call out, is an interesting one. We saw Click & Collect really open up in the first lockdown as customers were clearly working from home much more and actually, in a more convenient way, in many cases, of being able to get online groceries when you want to. So what we found, I think, is a continued capacity in our network to open up more order slots using Click & Collect and the Christmas wave, 24%, I think was a real indication of that. That worked for customers and it worked for the business because it meant we could provide more capacity, we could provide it efficiently. And we could, as I say, get up to that that 835,000 level. Of course, as you would expect, we're doing a lot to look at where else we can grow more capacity. I think it's really clear that the in-store pick model, we're really leveraging the fixed assets. Our colleagues are doing a fantastic job that continue to improve our operations. So we improve our productivity.You've seen our update this morning on our orders per van and drop density improvement. So as we said at the interims, we're very focused on the operational improvements, and we'll keep pushing those. Obviously, a third lockdown. Social distancing is incredibly important, safety very important. So I think in the next few weeks, we'll be keeping a very close eye on that. But there'll be plenty of lessons we'll keep learning, but we're very determined and very focused and the team are doing a fantastic job of opening up capacity and making sure that we use Click & Collect as much as we can.
The next question is from Fabienne Caron from Kepler Cheuvreux.
Three quick questions. Could you help us and give us an idea of the sales growth of the supermarket compared to the convenience stores in Q3 and maybe year-to-date? The second question on online. When customers decide to go for Click & Collect, is it same-day delivery compared to next-day delivery for online -- for home delivery, sorry?And the last question is, how did you keep with the increased volume in online for your in-store pick model? Did you ask your employees to work at night where your stores were closed? How did you manage this concretely to avoid disturbance in stores for customers going shopping in stores?
Okay. Thanks, Fabienne. So I'll maybe ask Kevin just to talk a bit about the sales mix between supermarkets and convenience, and then I'll try to give some more color on the online questions.
Fabienne, with the sales profile that we saw in quarter 3 mirrored what we saw in the first half. Supermarkets that didn't have any grocery online capacity, we saw sales down slightly, although better than in the first half. Supermarkets clearly with Argos store in stores with grocery in line or the combination of both of them, we saw strong sales growth overall from the box. And as you know, we look at the total economic box, if you like, not the -- when we're looking at the overall profitably of the units.Convenience, the performance sales were down in convenience year-on-year, better than quarter 2, but down. And again, the same profile as we outlined, I think it was on Slide 39 in the H1 update, with less urban stores growing, but overall sales were dragged down because London stores, in particular, and city center stores were down materially 15%, 16% year-on-year because of their location and clearly not having the footfall in those locations due to the various lockdowns across the country.And probably one other thing to add, just on the convenience, we opened 5 in the period, 2 of our new neighborhood store model, and we're really pleased with how they've performed over the Christmas period.
Yes. Thanks, Kevin. And then on to the online question. So I think on -- I mean, sort of 2 dimensions of Click & Collect to make sure we cover both angles. So on the grocery business, clearly, our customers can make a choice to click and collect in their store. So following the same patent of either picking home delivery or clicking Click & Collect. And as we say, more customers traded into that into the Christmas week. And we'll continue to make sure that the option of Click & Collect is available for as many customers as possible.I think we shouldn't underestimate also the Argos business on what happens on Click & Collect. Of course, we've got the 4-hour Fast Track Collection promise. And Click & Collect in Argos, very strong through the quarter 300,000 Fast Track Deliveries we did as well. And actually, just as we're talking about Fast Track in Argos, over the Black Friday weekend, obviously, as you'll remember, we guided to at the interims, we had a slightly different promotional approach with more discipline about the number of promotions we did on Black Friday, but we really focused on speed and convenience, and we saw Fast Track Collection and Fast Track Delivery really perform. In fact, the fastest Fast Track Delivery over the Black Friday weekend, the team, Matt shared with me was 57 minutes. So 4 hours is the promise, and that's the best we got to. And so therefore, Click & Collect both in the Sainsbury's channel and in the Argos channel is something we really want to drive, so it's really convenient for customers.On your question about clicking of online and what we're doing to balance the challenges of social distancing and disruption for customers and making sure we can both serve our customers in-store and online well, a few things we've done. We've increased the picking window. So just, again, honoring the fantastic job our online colleagues have been doing. We start picking now at 2 in the morning rather than 4, which opens up the window to get more of the picks done before we get into the trading day. We've increased the delivery window time later into the evening. We've introduced more savor slots, so customers can pick slots where there's capacity available at a better value price on the delivery slot. We're doing all sorts of things to fully optimize the window.And of course, as we put more volume through the home and delivery channels, so to -- the improvements in reducing the stem mileage and increasing the drop density is important because we're traveling less distance, and therefore, we can get to more orders more quickly. So just a whole focus in that area about making sure the store experience is balanced between online and home delivery, and making sure, as I say, we continue to drive the best service and the best efficiency we can.
Okay. Just to make sure I understand of Click & Collect for grocery, can I get the order in 4 hours for Click & Collect for grocery? Or is it next day?
It's the next day.
The next question then is from Sreedhar Mahamkali from UBS.
3 questions for me as well, please. Firstly, on online, some of the key drivers, very helpful in the slides. Couple of questions there. Firstly, on pick rate, how much further can you drive those now that they're pretty much back to pre-COVID levels? That's the first one.And second one, can you give us a sense of what's also been happening to the average delivery fee, please? And particularly in the context of what I see is like GBP 1 slots, which are quite likely well below the cost.And the last one is Argos growth. I know you called out a couple of categories. I'm just trying to understand how broad-based the growth was, contribution from gaming and any other key areas, that would be super helpful.
Thanks, Sreedhar. So let me try and just give you as much sense on the questions on online and then we'll pick up Argos. So I think on pick rate just to cover the history and then what we are now. So as you've seen on Slide 9, and we talked about this at the interims. We've seen progressive improvements, double-digit improvements in item pick rate over the last 3 years. And so the challenge, absolutely, as you say, was to conscious of all the social distancing impacts and the operational challenges to get back to that level. And that's what the team has got to. So I think sort of first point is to hold the level of item pick rate to where we were before COVID. And that's broadly what we're back to you now. I think, obviously, we're into a third lockdown. And so that will necessarily and absolutely brings an absolute focus on safety. And so in this immediate period, I think our objective is to make sure we provide as much capacity for customers, prioritizing elderly, disabled and vulnerable customers again, and we do that at the level of pick rate we're now achieving.We're through the Christmas peak period, that helps a little bit. Of course, there's less customers in store. And so there's a balance between the impact of the lockdown making it a little more challenging versus the fact we can get around the store a bit quicker at this time than we could in the middle of December.So I think we're very focused on the pick rate. We're very focused on the online metrics of pick rate, drop density, average baskets and the Click & Collect participation. And you'll see us continue to focus on those, and we'll update clearly at the end of April into further and progress we make through the period.In terms of delivery fees, we use dynamic slot pricing. We can constantly look at how do we optimize how we fill our slots, but also how we do them economically in the best way, and we continue to do that. And I'm sure as we come through the Christmas review, we'll continue to take lessons from that.One thing that I think is very clear the online demand continues to grow and the fact that we've gone from 700,000 in November to 830,000 last week just shows the size of the opportunity that's there, and that's why we're very focused on both the service and the operational efficiency.One point I should have made, just to Fabienne's earlier question and links to your question online, too is, of course, we have seen continued same-day service of Chop Chop really pick up. That's been a really positive feature of our performance on the Chop Chop platform where you can order for fast delivery.And obviously, we've been using delivery platforms to help with that, and we've seen some of the stores, actually a lot of the convenience stores that are the fulfillment basis of Chop Chop. You can see some really strong sales coming through. So just to give the other angle on Chop Chop and how that's working. And then on Argos, just to give a bit of sense of how the Argos business has done and some of the key factors, Kevin, maybe do you want to comment on that?
Yes. Of course. Yes, in August, if -- to sort of -- I pick out 5 big categories that are very important during this particular quarter. TV is very important; gaming, very important; furniture, very important; toys, not surprising. And then if you put domestic appliances, medium sort of MDAs and SDA, the small and large domestic appliances together. Those 5 are broadly sort of similar size. In the particular quarter, gaming was a little bit bigger, but not much than those categories.If then we talk about the growth, where is the growth coming from, TV is actually the largest growth in the period. Gaming and furniture, similar growth year-on-year. And then MDA, the larger domestic appliance will be sort of third. Toys didn't grow because of the trading stance we took on toys and particularly combined with Black Friday and coming into Christmas, focusing on managing the margin. And sports equipment grew. It's not one of the biggest categories, but that grew strongly as well. So hopefully, that gives you some color.
Thanks, Kevin. And just -- sorry, I was just going to say just one other point before we finish off on Argos, just on the online question. Just going back to the detail, again, one of the things just on that dynamic slot pricing, actually, we're very confident as we build the capacity by getting the slot pricing right across the grid that it's profit accretive. So that dynamic model is something that we continue to improve, but continues to drive the economics of the online stock capacity fulfillment.
And that helps, for example, things like the van utilization, which you see up 56% because -- so clearly, on the one hand, it doesn't look like a profitable delivery price, but it clearly helps the whole economics of the model.
So can I just quickly come back to the pick rates? I recognize your point about COVID and social distancing, but structurally, all things being equal, so a year out, 2 years to the medium-term point, do you see much room for improving pick rates further? Or do you now need to think about automating some of it or?
Yes. I think I would just reiterate what we said in early November, which is the store pick model has absolutely proven. The capacity has to go from, as I say, 340,000 to 835,000, and that's happened through this period despite significant operational limitations in the lockdowns.And as you'd expect me to say, prioritizing safety is first and foremost, absolutely front and mind. And so as we go into another lockdown, that's one of the things that I think in these next few weeks will mean that we're not going to see immediate further improvement. But I think beyond that, as we come through that period, just as we've done through the last 6, 9 months, you've seen how much it's improved. Given the initial impact, on Slide 9, how far it dropped back in the first lockdown, how much that improved through the summer. We'll get through this third lockdown. And then we think there's more to go out, and there definitely is more to go out, and we think there's more to go out fully optimizing the store model.As I said in November, we continue to look at other technologies, but right here and now, the way in which we're leveraging the asset base that we have by driving that degree of volume and improving the online metrics and setting route to do more of that is where we are. And as opportunities of new technology comes forward, we'll keep looking at it. But we think there's more to go out once we get through this initial further lockdown, Sreedhar.
The next question is from James Grzinic from Jefferies International.
I had 2 or 3 very quick ones. The first one is, can you perhaps confirm what assumption you take in terms of COVID costs for the second half that underpin that new guidance for profit? I think you've spoken to GBP 290 million in half 1, that would be interesting.And then, Simon, just to follow up on Sreedhar's points. Can you perhaps confirm what the average delivery fee is now for grocery online? And just whether you think that you can start widening the gap relative to Click & Collect? And can you perhaps also confirm whether the -- where the average basket size for Click & Collect versus delivered for food online?
Okay. So let's maybe try and give just some specifics on the cost. And I'll reiterate some of what we talked about clearly in November. So you remember when we talked about the cost in the first half, we talked about shielding and isolating colleagues was around GBP 70 million; safety and social distancing around GBP 110 million. And I think broadly as we guided to in November, of course, those costs continue to be very present in the business as we go into third lockdown. We are seeing absence rates increase. Within the -- obviously, the guidance that we've given you today, we've taken account of the fact that we expect further absence than we would have seen a few weeks ago. So we factored that into our guidance, particularly absence levels themselves and of course, the cost of shielding for extremely vulnerable colleagues, too. That's in our retail operations, and of course, in our logistics operations as well.So we factored into that a step-up in absence. We're around 8% at this point in time. The last few days, we've seen a step up, and we clearly expect that to continue. We've got, obviously, a lot of colleagues in our business, given the amount of recruitment we've done this time of the year we're coming off the Christmas peak. And so we're factoring in the cost of absence and making sure we've got all the colleagues we need to provide the really safe shopping environment for our customers, great availability and online as well. So that's really how we're thinking about the costs in terms of...
And James, just one other point, building on it, we'll update at the year-end, the real detail on this because clearly we just finished the trading period on Saturday. So we'll come back with more detail when we do the full year numbers for you.
And then I think on -- yes.
Sorry, I am going to follow up on that. Are you basically assuming that the social distancing and shielding rules that currently apply will continue to apply for the rest of your financial year?
Yes, we are. I think that we've been really consistent on that throughout. And actually, for all the reasons you would expect me to say, as we've come out of Christmas, we've reset again, making sure that all of our customers in terms of what we're asking our customers do when they shop with us, that everyone wears a mask, that we're back to ensuring the team uses social distancing absolutely is in place and doing absolutely everything we need to do to make sure our colleagues feel as support as possible. It's an anxious time, isn't that? And I think safety is front and center in the way we are making sure we're set up.So we're expecting all of the operational approach that we have to continue, certainly for the balance of this year for all the obvious reasons, yes.On your questions on relatively different prices, I'm going to guess not -- I don't really have a lot more specifics to share on that today, and I think we've tried to give you as much color about the way we're thinking about item pick rate, what we're thinking about drop density. As I say, the dynamic slot pricing and the way we do that, it's profit accretive and the way we optimize it. And -- so we'll continue to give as much color as we can on the online piece. And when we come back at the prelims, we'll talk more about how that's embedded down post-Christmas. So that's probably about as much as I can say that -- on this point.
And there's -- James, there's no big noticeable difference between basket and Click & Collect and the basket and home delivery. That's not what drives the -- it's just what's convenient for the customer and what's available. So the basket sizes are similar.
That's very clear. I thank you for providing all that incremental guidelines and those KPIs. It's very helpful.
Thank you. Thanks.
The next question then is from Andrew Porteous from HSBC.
Three for me, if I may do. Could you just give us an idea in terms of the sort of 60 million upgrade today, the relative importance? And sort of which parts -- sorry, yes, sorry. So which parts of the business have done the heavy lifting in terms of Argos versus stores versus clothing?The second question. Could you give us an idea if there's any sort of moving or anything to sort of consider from a cash perspective this year, given the stronger performance and the better profit outlook?And then lastly, a quick one on online. Could you remind us how many stores you do home delivery from and how many you offer Click & Collect from?
Thank you. So let me try and give you some sense on the -- let's go into key drivers of the change in guidance. I mean I think as you would expect, the primary and most significant one has been clearly as we come through the second lockdown and the change in the tiering situation before Christmas, that's driven more demand on the grocery business. And so we've seen as more customers have clearly needed to buy groceries to be at home, to work at home, Christmas arrangements have changed. We've seen that drive more demand on the grocery side.Obviously, we planned a good sense of that, but it's been ahead of what we expected. That's been, by far and away, the biggest factor. Obviously, the arrangement changes just before Christmas on the 19th of December, caused millions of families to have to reappraise their Christmas plans. And so we saw, particularly in the 5 days before Christmas, the impact of that. The 21st of December was the biggest day. Never seen that before. It was a real shift in the Christmas trading pattern. And so we saw both grocery overall drive performance ahead of what we forecasted. We also saw our stores in London and the Southeast before Christmas over index given the impact of the Tier 4 arrangements. Obviously, lockdown 3 this week. We've seen some uptick in demand, not surprisingly. Again, as customers need to buy in for the lockdown when we factor that into our guidance.Of course, we have prepared for a worst-case Brexit. And so obviously, as the good news of that situation change, we've been able to factor in the contingency that we had assumed for that. So on the food side, I would say that demand, the Southeast, impact post Tier 4 and the impact of the lockdown are the sort of key components, the Brexit contingency.And then the other factor I'd put out is that we've talked all the way through about the Argos business. And we were working on the premise that some of the sales would have been pulled forward. In the end, the Argos business continues to do as you've seen really well through the Christmas period. And so that was another key factor in what we've been able to announce today.Then on the cost side, I'll ask Kevin a minute just on the cash. But clearly, we've had better full price sales across general merchandise and clothing. A lot of the seasonal products just sold through very cleanly. I mean it's just an example of that. Now in our stores for Christmas, products like Christmas, decorations, Christmas trees, all of those products just sold through ahead of Christmas, and we were left with no stock afterwards, and that applies in a lot of the seasonal areas. And as I've described, the online efficiency continues to improve, and it's an area that continues to help the cost position.So that would be the overall picture in terms of the key factors that have driven it: grocery first, Argos demand, the impact of the tiering across the board and then the Brexit situation.On the store split between delivery and Click & Collect, we offer Click & Collect in 330 of our stores now, and we pick from 268 of our supermarkets.
And Andrew, just picking up your cash point. We're in a good position on cash and working capital. Clearly, it's a trading update today. So we don't have all the detail, but we finished the trading period with a clean stock file which is always good. And as we said at the interims, we expected a lot of the working capital benefit on the first half to unwind some of the -- it always does unwind because we're building up stock for Christmas. But particularly as we rebuild the general merchandise stock, where we've had very strong sell-through at Argos.We'd expect that some of that will still happen because we will rebuild some of that stock. It will just depend a little bit on the trading patterns, but we expect to be in a good position from a working capital position and from a cash position at year-end.
That's really helpful. Just one quick follow-up on the Click & Collect side of things. We are probably a bit more constrained by the 330 than the home delivery is in terms of customer demand because I guess you're effectively asking customers to do the longer stem. Does the increased popularity of Click & Collect change your thoughts over how many stores you pick it from?
Yes. I think -- I mean just to kind of go back to what's happens here. Obviously, we've added a very substantial number of new Click & Collect locations this year and clearly, not just in stores we pick from, but also stores where we don't pick, and we're offering Click & Collect. For example, in my local store in York and Monks Cross, we don't pick in that store, but we now offer Click & Collect, and that's been really well received by customers, and there are clearly a high number of stores that are in that operational circumstance.So I think 2 things are driving us here. The first thing is, we clearly add more pick stores as the capacity has happened, but that's been a relatively few number of locations. We had about 15 extra locations to pick in this year. And that gives us one more capacity but also balances the volume of product going at the back of the door versus out of the front of the store so that the customer experience is maintained.And we'll continue to look at more locations. We can add Click & Collect to your point, for obvious reasons. If it works for customers and it works for us, it's absolutely right that we get to as many locations with Click & Collect as we can.So I think we'll evaluate the Christmas picture as we get further into reviewing what's happened over the last 4 or 5 weeks. We're pleased with how Click & Collect has performed, and we see opportunities to continue to grow it.
The next question then comes from Clive Black from Shore Capital.
Couple of questions then. First one is quite particular. But you mentioned Brexit there for the first time, which is very refreshing not to have to overtalk about it, Simon, but is the situation in Northern Ireland, one that's concerning you and could it be notably costly in your Q4?And secondly, I guess, more for Kevin. But noting what you said about being ahead on profit expectations, I would imagine, very strong negative working capital. Kevin, do you think the scope to actually bring forward your deferral of debt reduction targets, which you set out to 2023 when we talk to you in May?
Thanks, Clive. Okay. Let me give you a sense of how we're thinking about Northern Ireland and then I'll pass to Kevin. So I mean I think, as you say, I mean, the key thing here is clearly how pleased we all are being able to reach before the end of the year. Because whilst we have clearly contingency plans in place for no deal, clear the disruption that would have caused with been a whole different situation.So the first thing to say is that flow of goods into Northern Ireland 7 days into this, it's broadly going as we need to. We've got products available for customers. We plan really closely with our suppliers over a very long period of time.We've made robust plans, and there's been minimal disruption to supply so far. There's been individual small examples, but in the ground scheme, there's level of change that we've seen happen, Clive. If I look from a customer point of view in the 13 stores in Northern Ireland today, the vast majority of our products are there. And we're working through making sure that some of the issues we need to work on in the next 3 and 6 months.Obviously, we've got to work through export health certificates and through the grace period. We've got to work through the prohibited and restricted items in the next 3 months. So those things are all in front of us still to do. There's bureaucracy clearly associated with that, but we're working with all the right parties in the right way, actually across the industry to face into it.So look, it's early days. The most important thing is customers in Northern Ireland could get the products they should expect. And that's where we are. We've put some contingency in place to make sure that products were available in an event of a no-deal, and so we'll continue to review that, and we're very close to making sure the right conversations are happening because as you say, we can't afford to put any cost into the operation at this time, and we'll be working really hard to make sure that's not the case. Kevin?
Yes, Clive. Yes, there's a few moving parts here, Clive. Clearly, the reality is we do have to repay the GBP 440 million of rates that was in our original thinking. So that's obviously going to drag on the debt repayment. We will see a benefit from the increased profits. You're absolutely right. So that's GBP 50 million, GBP 60 million that we should see, which should eat into it. On the working capital, it's just a bit soon to say where that's going to -- we clearly have targets, and we'd like to hold some of that working capital benefit, but most of it will unwind. So better, if I update you at the year-end when we fully analyze the numbers, but the profit number will definitely flow through.
Okay. And then, Simon, just more broadly on Brexit, there's a lot of noise and uncertainty around country of origin of products coming into the U.K. and various ingredients that are utilized from Europe and then manufacturing in the U.K. Is that something that is also worrying you and worrying the industry?
Yes. Thanks, Clive. And I think as you say, I mean, some of these factors have clearly become clearer since we've seen the detail of the agreement, and particularly, as you say, products and the origin of where their process is one of the things that we're working through.So if I was to describe at the headline level, we've got to iron out some of the remaining issues around the Northern Island issues, as we've just talked about. And of course, we've got to work through on -- particularly the issue that you've talked about. And we've got the right conversations happening across the industry to make sure that we can solve the issue. There will be changes. We'll need to make as a result. We haven't got to all of those answers yet. Our priority right now is being stock availability for customers. But over the next 2, 3 months, these issues about where we're bringing products in from, what the impact of that is and how do we reset that what we need to is going to be a key priority for us to work on.I should just lastly say that for our teams and supply chain, logistics, particularly technology and in the trading functions, it's been an incredibly busy time, right up until the New Year. These issues are being worked up right up until the last few hours prior to the 31. And so having got that in place for customers, we now need to turn our attention to the issues that you're talking about, and we will be.
Yes, I think it was Michael Goes plan all along, wasn't it not have enough time to work out anything. But anyway, well done on your joint statement and all the best for the future.
Thanks, Clive. Good to speak to you. Thank you.
The next question then is from Xavier Le Mené from Bank of America.
Two, if I may. Just on the growth rate performance, can you give us a bit of color on volumes, mix and inflation potentially on what you have seen in Q3 and potentially what you're expecting heading into 2021?And second, you sounded a bit disappointed with the price perception improvement. So may I ask why you think is that improving as fast as you think? And potentially, what is the plan to improve that going forward?
Yes. Thank you. Well, let me try and give some sense on both, and I'm sure Kevin might want to comment on the first point as well. But I think just in terms of the overall position that we've seen, I think, obviously, we've been very focused on value for customers throughout the quarter. And you'll remember at the interims in November, I laid out the action we've been taking, particularly in our fresh food business, particularly in areas like meat, fish and poultry. And across our wider fresh food categories to bring better value to customers.And so we've been very focused on just continuing that strategy through the quarter, and we've seen the benefit in volumes as we've particularly focused on improving value at the center of the plate, and we'll, therefore, have been significantly seeing the benefits of that and value perception in those areas.But value perception takes time to change, doesn't it? And so my comments on perception of value weren't disappointing. They were more just reflecting the fact that we've just begun a strategy to put food first, and we're very focused on improving the price perception of our customers, and we'll continue to do that, not least, evidenced by the price lock we've just announced last Saturday with 2,500 everyday products on it.More broadly in terms of the pricing environment, I think, clearly, sort of 2 things to say here. I mean we didn't take part as extensively in some of the promotional activity in areas like beers, wines and spirits. And you can see the impact of that in the data I've shared on our relative value growth this morning. We did use other mechanics to give customers value, for example, the 10x net to points that we use to encourage customers to shop early, we think was a really important and successful way in which we encourage safer shopping, bringing the capacity earlier but also giving customers value through net circle for doing that.So we're very focused on value. We think broadly that the market would have been less inflationary in quarter 3 than in quarter 1 and 2. We're bringing more value to customers. And you'll see us continue to do that because to your key point, our strategy is to improve price perception. And we're organizing all of our activity to make sure that we progressively continue to do that.
Xavier, one thing I'd add on the inflation point. It is just hard to read at the moment. There's a lot of noise and changing in consumer shopping habits. So for example, smaller turkeys for bigger turkey and where we saw in your mix question, we saw growth in both own brand and brand, but we saw a mix into premium with stronger growth, for example, in Taste the Difference than in some of our less-premium brands, and we saw strong growth in things like premium champagne, et cetera. So people want to treat themselves. That will have effect on some of the inflation numbers you see because, obviously, the average selling price because, if you like, it's good inflation, not bad inflation.And but overall, the trend, as Simon said, is -- we're seeing both in the industry and in our business, lower inflation in quarter 3 than in the earlier quarters.On the volume question in more detail, we'll get Nielsen volume detail later today. We don't have that which, obviously, will then analyze and get what we can from that understanding.
The next question is from Rob Joyce from Goldman Sachs.
Three for me. So first one, it's been an extension of an earlier question. But if we look at the full year, I think if we ex out the bank and fuel, we're looking at retail profits up somewhere in the region of GBP 200 million to GBP 300 million underlying. Are you able to give us the split of that between grocery and the nonfood channels? That's the first one.Second one is just on online. Thanks for all that detail. If we put it all together, are you able to give us an idea of what the cost to serve has fallen by in totality in terms of pounds per basket may be or in terms of percentage on that basket.And then the third one is just looking to the future now, given the shift to online, but obviously, you've made improvements there. Do you think in a normalized growth environment, Sainsbury's is a fundamentally more profitable or less profitable business in terms of margin than it was prior to COVID?
Rob, thank you. So I want to try and give as much as I can, but on a couple of your questions, we won't be able to go a lot further than we said. I mean I think on the guidance, as you say, we don't split it out between grocery and each of the product channels. So I can't give you any more on that I'm afraid. Kevin?
Yes. No. I'm sorry, Rob, and it is a trading update as well. So -- and we finish trading on the 2nd. Yes. So we don't share that level of detail, and we'll come back at year-end with a bit more color for you.And just on the online profitability point, in the first half, we saw sort of total cost per order down somewhere between 8% and 9%. So we'll have seen an improvement on that. We don't have all the full analysis done. And again, we can update on that at the year-end, but that would have improved a bit over the period.
And then to your third question, Rob. I mean looking ahead, of course, you'll remember the comments we made in November in terms of the strategy, which very much is about as we put food first in our priorities, and we really focus on delivering a return on each of our brands, and we accelerate our cost-saving plans, we're confident we can see through once we get through this COVID period, the priorities that we described back in November. And we're confident that we bring a greater focus on food as we invest in the price perception that we've already talked about this morning. That will drive an increase in our primary customer base, and therefore, grow our ability to drive trade up.In one of the comments I, obviously, just put out from the Christmas period, again, it's really clear that customers have had a propensity against trade up this Christmas and to a large extent, we satisfied that, but we see opportunities to go further with that. And of course, as we get into the detailed review of Christmas, we'll be looking at where else we can take the trade-up opportunity in some of the premium tier ranges as we grow the primary customer base. And I think clearly, the shift online, as you say, hugely significant. Who'd have thought back in March that we'd be here today talking about 9% and 20% of our grocery volume going through online now.As we've described through the call this morning, we're very focused on capacity, and we're very focused on the operational metrics to drive the efficiency of the online model. And at the prelims, we'll give as much of a sense as we can of how much further that's moved, and how we see it evolving as we go forward. I think we talked in November about the economics of the box overall. And our plans on safe to invest, very focused on how do we deliver the most efficient online operations but also as the demand curve changes between online and store, how do we find efficiencies in the rest of the store as well.So I think plenty for us to go at, but I think the priorities we've laid out, these 3 core priorities will give us a lot to deliver in the next 12 months and giving us a really strong start point in terms of delivering against the commitments we've made.
Really helpful. Just quickly, Kevin, on that 8% to 9%, does that include the shift to Click & Collect? That's a blended number here?
Blended number. Exactly.
The next question then, it comes from the line of Nick Coulter from Citi.
Just 2 very quick ones, mindful of time. Firstly, could I ask for your sense of how much unfulfilled demand there is for your online offer at the moment? And whether you think perhaps penetration has broadly peaked for now, having gone through Christmas? So that would be the first one.Then the second one would be just around if I could check on the timing of the MFP investment that went in. From the data, it looks like you saw a very quick volume response to that investment.
Yes. Thank you. Yes, I think on the demand picture, when I think sort of a couple of things to say there. Clearly, we've gone 340,000, 700,000, 840,000 last week. There's still demand to fulfill. I think when you look at industry predictions post-COVID, I think sort of the broad view is somewhere in the mid-teens. We're planning to be closer to where we are now than that. And of course, there'll always be certain parts of the U.K. where we need to add more capacity. There'll be other places where we can use what we have available still.So we'll keep looking at where we need to add more in. The focus for us here is on the profitability of the online operation and delivering for customers as we come through this third lockdown, which inevitably creates a bit more of a spike. I think things will settle down a bit after that. And as we come through COVID, let's all hope by later in the year, we'll get to a clear picture of what the kind of watermark is at that point in time. So we're at 18% for this quarter. That's grown through the quarter. I'd expect us to be closer to that than the industry predictions overall.
And Nick, the only other point I'd add is, the great thing is we've got the flexibility with very limited capital expenditure to flex up and down depending where our customers go.
And then on the...
Sorry, you expect the broad proportion of the doubling effectively to stick is what you're saying?
Yes. I mean I think as I said, I think industry production is 15%, 16%. We're at 18% and growing. I'd expect to be closer to 18% than 15%.On MFP, so what do we do here, just to reiterate. So back in September, we began the work, which really focused on how do we win the center of the plate. That was the core strategic objective that we began to answer. And we invested in price around 300 products in meat, fish and poultry, as you say. And as you say, we saw a volume increase as a result. We saw a double-digit volume increase, which pretty much sustained as a result of that. And what we've done this week is we...
November, though you put an investment. I'm just trying to clarify the timing of the investment.
We did the investment at the back of September, and we first reported on it in November.
Okay. So it took a few weeks to work through them, essentially, but you saw a very strong volume response?
We saw a strong volume response. And just going back to the detail that we shared with you, if it's helpful in November. What we did was effectively, we focused on meat, fish and poultry, and we focused on what we were doing in terms of those core products that really form customer perception of what we were doing on price. And what happened was we dropped 300 products actually first week in October, and we saw a volume uplift across meat, fish and poultry between pre and post investment of 11%.In some of the key products, for example, mints 5% flat, we saw just under 30% growth in the volume. Big baskets, well, it's 10%. So these really key high-volume lines. We've seen the volume shift significantly as a result of what we've done there. And then this week, as I say, we've just launched our price lock campaign from the 2nd of January, 2,500 everyday products in that price lock. And again, meat, fish and poultry, an important part of that. And we're very focused on this center of the plate point. How do we convert to more primary customers and how do we use the work we're doing in this area to support that.
Very much. It certainly seems to have had the desired impact on your switching.
Thanks.
The next question is from Maria-Laura Adurno from Morgan Stanley.
Most of my questions have been answered. Just one very quick question. Perhaps if you could comment on levels of absenteeism, where they stand and where you are in terms of potentially having to hire new people. Any comments would be extremely helpful.
Yes. Thank you. So I mean, just to reiterate where we are on absence. We're around 8%. We've seen, not surprisingly, absence increase over recent days, for all the obvious reasons. And of course, we're paying a lot of attention to absence, both in our retail operations in stores and online and also in logistics as well. As you'd expect, given the third lockdown this week, we put in place all of the support for our colleagues, you need to shield or for our extremely clinically vulnerable colleagues. So all of that is in place, and that's factored into the financial assessment we've made of our costs in the balance of the year and in the guidance that we've given today.In terms of the resourcing in the business, the other side of your question really, which is how do we make sure that we've got enough people to look after our customers. 172,000 colleagues are in the Sainsbury's business, Sainsbury's Group business at the moment. We've hired significantly more colleagues year-on-year, and we expect to exit this year with more colleagues in our business than we began the year for obvious reasons.A lot of colleagues are supporting the online operation. And so as we come out of Christmas, clearly, the impact of the third lockdown, clearly the impact of the increased demand in grocery and Argos, clearly, the step-up in online operations is making absolutely critical and the team are doing a brilliant job, just really focused on making sure we've got all the people we need to serve our customers and making sure, obviously, we're supporting our colleagues that need, as I say, to shield. So that's where we are on it. And I think focus is all about delivering for our customers through what's going to be a very challenging few weeks ahead for all the obvious reasons.
The next question then comes from Tom Davies from Berenberg.
Just 3 questions from me. Given you guys look at the whole box and the sales densities of the whole box, in a normalized environment, given that online will be less cash profitable than in-store sale, what kind of incremental sales densities are sort of you need to achieve in order for that store to continue growing its absolute cash profitability?And second, in terms of switching gains, who are you seeing the gains most from? Is it the discounters? Is it Asda?And then thirdly, in terms of the Argos restructuring, what's the time frame for this restructuring the model, closing the stores? And do you envisage any potential execution risks or supply chain issues when you change all?
Thanks, Tom. I'll maybe pass to Kevin for the first one, and then I'll try and give some commentary on the Argos and on the switching.
Sure. Tom, you probably won't be surprised. I'm not answering -- able to answer that question in detail, and we wouldn't close a trading update to answer it. But we will come back and talk more about the box economics because I know how important it is for you, and it's obviously something we spend a lot of time looking at. But that level of detail, we probably -- we're certainly not sharing today, and we need to consider just from a confidentiality and competitive point of view how much we share.But I mean, we did say in the first half we had stores that had an Argos store in store, grocery online and walk-in customers grew their sales by 18%, whereas grocery online on its own with walk-in customers, grew the sales by 11%. And if you had a Argos store in store, no grocery online and walk-in customers, we grew by 8%.So you can kind of see that as we push more offer into the store, we grow the sales very materially. That clearly increases the margin pool against a fixed cost base. And then we've got lot of work working on the various variable costs, and Simon's talked about the online levers, et cetera. So it's a big focus for us and something we'll come and talk about in more detail in future sort of sessions.
Thanks, Kevin. And then on the 2 other questions, but I think just obviously in terms of the switching, we'll see the volume data when that comes through. I think the theme as we've seen through COVID, we've seen obviously many customers have been choosing to shop in larger supermarkets than discounters certainly through the lockdown. And I think that theme has continued, borne out the latest data that we've seen, obviously, different performances for the different discounters. But I think the sort of key thing there that we have seen, obviously, growth, and we've grown market share in food through this period and inevitably, some of the actions we've been taking in areas like meat, fish and poultry, we think, has been important in terms of beginning to address value perception and winning those baskets.We'll look at the data off when it comes through for the Christmas products itself, but on the way into the mid-December, which is the last reported period, that was certainly the picture we were seeing in terms of the switching. I think in terms of Argos, just to reiterate what we laid out in November. So we're beginning a 3-year transformation program in Argos, which will see us clearly close the vast majority of the stand-alone stores, open more Argos store in stores inside Sainsbury's supermarkets and collection points, both in supermarkets and in convenience stores.We're well on with the program of planning this for the first year. Clearly, it's predicated on getting the local fulfillment center network up and running, and we're planning the first phases of that.The point I would just want to make and acknowledge is the fantastic job our colleagues in Argos have done through this period. We announced these significant changes at the beginning of November. And the way in which the Argos team have led and delivered Black Friday and this Christmas has been absolutely outstanding. And so we're on with planning the changes. Obviously, we're very focused on the demand in Argos at the moment and making sure that we support our colleagues and look to redeploy as many of our colleagues as we can as we begin to deliver the transformation plans that we've talked about. I think we've got 3 of the LFCs up and running already. And of course, we'll be balancing closely, making sure we're delivering customer availability, strong customer offer in Argos at the same time as delivering the changes that we've begun.
The next question is from James Anstead from Barclays.
Two quick questions. Firstly, you mentioned you were very pleased with this 10x net-to-point scheme to smooth demand in that week up to Christmas. Is that a mechanism you could imagine using more widely smooth demand? Or is it really only the kind of extreme volumes around Christmas when that volumes come into play?And then a question just for Kevin as well probably. The one number that perhaps caught me called this morning was the kind of the jump in the net new base contribution to be quite notably negative this quarter, which I guess is the fact you permanently closed quite a few of these Argos stores from November. Is a 2% hit per quarter a sensible source of assumption for quite some time to come now given you're planning to shut most of the Argos stores? Or might it even get a bit higher for some time?
Should I just pick that one up? James, you're right. The 1.8%, it's 148 stores, which we treated as open up until quarter 2, albeit they weren't trading, but they haven't officially closed. We treated them as closed, and that's what's driving that difference that you see as you go from quarter 1 to quarter 2 into quarter 3.We'll need to come back and give you a bit more help. I don't have a -- I don't -- I wouldn't want to give you guidance now that haven't checked, but we'll come back and help you plan for as we do the store closures as we finalize those plans over the next period of time, if that's okay. James and I will help you with that.
Yes. I suppose just one quick follow-up then. You've treated them as essentially closed from the third quarter rather than middle of November...
Correct.
Okay, right. So it's -- okay. Yes, that's helpful to clarify that at least. But yes, that's helpful.
Thanks, Kevin. And then just come back to your question on 10x. I mean I think just the genesis of this was really all about the planning phase of Christmas, James, how could we manage what was a very uncertain set of challenges around capacity in supermarkets and very thoughtful about the impact of social distancing. So the team did a really great job looking at different approaches we could take to bring forward some of the demand, particularly in those areas of the product base on grocery and ambient products where that was going to work. And so this was driven out of an objective of safety and smoothing the customer demand curve and the reason that we did it.And as you say, look, as part of our review of Christmas, we'll have a really good look at how it's worked. I mean we're pleased with it. Customer feedback has been good. It's enabled us to pull forward sales in these areas, which has opened up the capacity to be able to put more of the perishable products through the pipe, just prior to Christmas. So I think it's served a number of objectives: safety, first and foremost; balancing the customer flow into stores, which was something that was very much on our minds when we couldn't anticipate how the peak 4 or 5 days to Christmas would be; clearly using Nectar to reward customers for shopping early and enabling us as we look ahead, to find ways of further optimizing the peak days before Christmas.So they were the factors that went into it. And yes, our early assessment of it has been successful. We'll do the full wash up on it and look for further applications from that.
That completes the queue of questions. I'll pass back to Simon for closing remarks.
Thank you. Well, just to thank everyone this morning for joining us at short notice, very conscious that we pulled our update forward today. So thank you for your time. Thank you for all your questions, and I hope we've been able to answer them as fully as we can. Just to finish by saying, obviously, a huge thank you, again, to all of our colleagues for the fantastic job they've done and to our suppliers too. Actually, our suppliers have worked incredibly hard to support what's been a very challenging period, so a big call out to them. Thank you to you for your questions this morning.And to say, of course, we'll talk again at the end of April for our preliminary results. We're very focused on our strategy, our 3 core priorities, which we'll update you more on then in terms of progress. And thanks for joining today, and stay safe and talk soon. Thanks, everyone.