Good day, and welcome to the Sainsbury's Preliminary Results Analyst Q&A call hosted by Simon Roberts. Simon, please go ahead.
Thank you. Well, good morning, everybody, and thanks for joining us on our preliminary results call this morning. I know it's a busy morning, so we really appreciate your time. I'm joined here this morning by Kevin O'Byrne, our CFO, and I hope you've had a chance to read both the statement and see our presentation that we posted on our website earlier today. We've had a year of unprecedented change, and as a business, we've really responded to this, and we're a stronger and more agile business as a result. This has only been possible through the outstanding efforts of everyone working across Sainsbury's, our entire team. I want to register a huge thank you to all of my colleagues for their unwavering and commitment and resilience throughout the last year.
Looking to the year ahead, there will be further significant external challenges that will impact our business, our colleagues, and our customers. We are well-placed to deal with these. One year into our three-year plan to put food back at the heart of Sainsbury's, we've delivered significant improvements in grocery value, innovation, and customer service. We are determined to continue this momentum, building in particular on the far stronger value we are now delivering for customers. We'll do this the same way we've delivered the progress we've made so far, consistently putting customers and colleagues first, listening to what they want and need, and making bold decisions to fund and prioritize these. This is shown through in our customer satisfaction and strong volume market share performance.
We expect this to continue as we know we have more resources than many of our competitors to continue to improve our relative value position at a time when value matters more than ever to our customers. What I hope you will have taken away from this morning's statement and presentation is that we are confident that we can maintain our strong competitive momentum. That confidence is reflected in our commitment to our shareholders. We've delivered strong cash flows, we've reduced leverage, and we're confident we can continue to generate strong, sustainable cash flows. In turn, as we set out in our capital allocation framework today, this means we can now commit to returning a higher proportion of our underlying profits to shareholders. Okay, now to hand over to the operator and take your questions. Thank you.
Thank you. Everyone, your question and answer session will now begin. If you wish to ask a question, please key star then one on your telephone. If you decide to withdraw it, you can key star and two. So just a quick reminder, star one for a question. The first question is coming from Andrew Gwynn, BNP Paribas Exane.
Hello, Andrew. Good morning.
Andrew.
Yeah. Morning, Simon. Morning, Kevin. Thank you very much for the opportunity. Just coming back to the statement around the consumer, obviously really beginning to see the worst of the energy cost increases coming through. What would you call out? Is there any sort of pronounced change in consumer behavior so far? Then just thinking about the two business lines, obviously within the general merchandise business, there's been some fairly significant availability challenges. Maybe over the year they start to improve, but do you think that would be a significant tailwind to offset some of the macro pressures? Thank you very much.
Andrew, thank you. In terms of the customer, what we're seeing, well, I think there's really three areas I'd call out. I mean, the first is to say that clearly we're seeing a continued normalization post-pandemic, which is characterized by more customers coming back into store, online stabilizing around 15% of total sales, albeit still twice the number of, you know, online orders that we saw pre-pandemic. Clearly more customers getting back to the office, traveling more, which is driving, you know, more food out of homes. That's the first theme. I think in terms of the impact of prices and inflation, what are we seeing? Well, I think it's early days yet.
Clearly this month's the first real impact of the energy costs, and clearly we're staying very close to it. I think early to see any significant change in customer behavior, but customers clearly are watching every penny and every pound. That's why, you know, as you've seen in our strategy that we laid out in 2020, we've been really determined over the last 18 months to get our value in the position it's now in, which means that we can demonstrate that we're growing share, but also that we're leading all our key competitors on the key products customers shop for. In the anticipation that the impact of inflation will be increasingly on customers' minds, we think we're really well-positioned to be able to, you know, continue to present good value.
The third thing we're seeing in terms of customer behavior, I would say is that, you know, at certain points, customers are looking to trade in and trade up. We've had a good Easter relative to the market. The same was true at Mother's Day. You know, we think about the, you know, the events in the year coming up. You know, we see those as opportunities where customers will trade in. That's on the food side. On general merchandise, to your specific question on availability, yeah, absolutely, we had some real challenges into the peak period over Christmas. Particularly in consumer electronics, particularly in toys. That situation has been recovering, and when we look at our availability stats now compared to even three months ago, we've seen quite a substantial improvement.
You know, one clearly we're continuing to push hard for. I think the outlook on availability, clearly we're watching the situation in China closely, teams working really closely with our suppliers. You know, I think it's hard to call yet, what will happen there, but we've learned a lot over the last 18 months, clearly, and we'll be staying very close to it.
Okay, great. Thank you. I'll hand over to somebody else.
Thanks, Andrew.
Thank you. The next one is coming from James Anstead from Barclays.
Hello, James. Good morning.
Morning, James.
Good morning, Simon and Kevin. Perhaps a question for you each, if that's okay. You've talked about the investment that you're really focusing on, your top 100 lines, and that certainly seems to be working if we look at the you know the volume stats you showed us. How different would the price investment from the average selling price kinda chart look if we saw the overall offer? I mean, again, the results seem positive. I'm interested just to know how you know different the pricing might trend on the back book, as it were. Perhaps a question for Kevin, which I'm sure a lot of people are trying to do the math like me.
In terms of profit bridge between the GBP 730 million you've just delivered for UPBT and the GBP 630 million-GBP 690 million you're guiding to for the year ahead, I just wonder if you can talk about some of the moving parts, which are the bigger elements to be aware of. Two particular bits. I think you mentioned, effectively, there's a GBP 100 million profit benefit in the base year from elevated grocery sales. Are you expecting that to completely disappear in the year ahead or just step backwards? Just to be completely clear on general merchandise, clearly you've got these cost savings to offset the challenges that Argos is likely to face. Are you expecting Argos net to have a down year in terms of profitability?
Accepting that, anything you say at this stage is subject to lots of potential changes in the following 12 months.
James, thanks. Okay. Why don't I take your question in terms of overall value position, and then Kevin can take us through some of the outlook that we're thinking. In terms of value, look, as we I hope have laid out in the presentation, kind of two key proof points. First, as you say, that we are deflating on the 100 product customers buy most often. More broadly, the reason we think our volume share has responded as it has is that our value has improved against all of our competitors in terms of VI on the overall basket. We've been able to do that because, you know, we've deployed really three key platforms on value.
One, Sainsbury's Quality, Aldi price match products that customers buy most frequently, fresh products, 150 new products last week with a real focus on fruit, vegetables, salads, dairy, meat, you know, the products we buy week in, week out. Second, our Price Lock program, the most extensive in the market, up to 2,000 products, everyday staples, dishwasher tablets, tinned tomatoes, pasta, rice, where we lock down prices for eight weeks. Then thirdly, the growing impact actually of Nectar prices, where we are serving customers now. Over a million customers are benefiting from this on the SmartShop platform. Unique prices just for you.
When we think about all of that together, that's it's the combination of the three value platforms that we think is the driver between more secondary customers coming back into Sainsbury's and our overall value position improving. You know, I would, you know, I'd just reiterate again, we've been on this for 18 months. You know, we continue to refine our approach. Clearly, you know, we're targeting the value investment where customers notice it and value most. Our algorithms and our insight tools are working, you know, very hard to continue to pinpoint this value investment, which is what, you know, gives us the real focus to make sure that we keep executing against this plan. You know, overall, of course, it's funded by improving volumes, but also our cost saving program.
That's, you know, that's something that we think we've still got unique savings to go at, which gives us the firepower to invest back in price. You know, as you'll see in today's statement, we are, you know, absolutely determined to make sure we hold on to the value position that we've we've put out there. In terms of us against the market, if it's helpful, you know, we're inflating 1%-2% behind the market. So we're slower in putting prices up and that kind of level behind where market inflation is. Kevin, do you wanna pick up the outlook?
Yeah. Morning, James. Yeah, as you said, it is very early in the year, and as you can imagine, we're running a number of scenarios. If you think about going from the 730 to, let's say, the midpoint of the range we've given you, there's probably four things, key things that we'd be thinking about. One is the level of unwind of COVID benefits in the year and, you know, how much of that you mentioned the GBP 100 million, how much of that will we keep some of that increased food volume. Two, operating cost pressures.
The final two, which are the bigger elements, is the input inflation in food and our ability to pass that through to customers and the general merchandise demand, which probably is the most difficult to forecast at the moment, particularly as we look into quarter four and increased fuel prices, energy prices for consumers as we come into Christmas. If you look at our sort of base assumptions, we're assuming significant volume decline in general merchandise, and that'll be offset by transformation cost savings and some price increases. We're being cautious there.
On the food side, we're assuming, you know, small volume decline offset by small price increase, but the real sort of critical factor in food is the food margin. We obviously have made a key commitment to sustain our relative value position. We're assuming the food margin will be down slightly, and then the range of forecast will depend at the sort of pace at which we're able to pass on that food inflation. We're assuming that we're passing it on more slowly, and therefore that's in our sort of base assumption.
The sort of two, if you were just going straight from your sort of GBP 730 million to, let's say GBP 660 million, the midpoint, the two big building blocks, lots of ups and downs, most of it playing a draw, but the two big building blocks is gross margin on food and volume on general merchandise.
That's very helpful. One very quick follow-up on a slightly different topic, but the bank paying this GBP 50 million dividend, I'm presuming that it would be a bit much to assume that the bank can afford to do that every year, going forward. You wouldn't be encouraging us to stick that in the model every year from now on?
I mean, oh, so sorry . Yeah, you know, I mean, we're on a journey here, you know, and obviously really, really pleased that we've gone from being, you know, putting cash into the bank, the bank being self-sufficient from a cash point of view, the bank now distributing excess capital. We would like to get to a point where there's a regular dividend from the bank, but I think, you know, we'd need to see a couple of years of sustained growth.
Yeah.
I think we could.
Yeah.
We could assume that. You're right, I wouldn't be putting it in your models for this year.
Very helpful. Thank you very much. Sorry.
Thanks, James.
The next question is coming from Rob Joyce from Goldman Sachs.
Hello, Rob. Morning.
Hey, morning. Thanks for taking the questions. I'm afraid they're kind of just a little bit more sharpening some of the previous from James. The first one, just on. I'm pretty clear on the moving parts and the guidance. To be clear, in terms of the general merchandise, are we looking at, so if we go back historically, you can see, I think, in the 11, 12 real income squeeze, Argos like for like was down about 9% and EBIT was down GBP 100 million or so. Is that. Obviously excluding the cost savings benefit, which I know you have, but is that the kind of thinking we're looking at for this year? Is that the basis for how we look at this year on the GM side of things?
The second one is, again, on the other part of the guidance, the input inflation. Am I right in assuming, I mean, all the external data tells us that you guys are maintaining, if not improving, your price position, and the market seems to be broadly passing through inflation. Is the guidance embedding a change in that you have to start absorbing more of that input cost inflation than you currently are? The final one, again, all kicking off from James', is on the bank. I mean, paying a dividend and then guidance that bank profits go up, but the guidance seems a little bit more bearish in the rest of the business. I'm just wondering how you reconcile the two, those two messages. Thank you.
Rob, thanks. Well, look, maybe I pick up your GM and food question and then Kevin on the bank. Look, I mean, as you've just done, of course, we've looked at the history. Within the discussion that Kevin's just shared with us, you know, high single digits impact on GM is what we've looked at in our model. Obviously, it's early in the year. You know, I think we are particularly thinking about the quarter three, October period onwards, when the impact of fuel and energy comes again. In answer to your question, that's the way we're thinking about the GM at this stage.
You know, I would just say that, you know, you've seen what's happened in the exit point of this year, an improvement in the trend, more encouraging sales, and obviously availability improves. We'll see what it looks like, but without doubt, more challenging and therefore that would be our assumption.
Simon, is that the kind of operating leverage, though? Do you think there's still similar operating leverage in the business than back then? Is that the right analogy to make?
Yeah, I mean, I think we should, you know, let's just remind ourselves of what we're doing in terms of transforming the operating model in Argos. We are, you know, about halfway through delivering the value benefits of our Argos transformation program. GBP 105 million of cost out in the changes in our store model. Clearly, all of the change in logistics as we bring that together as part of a much bigger cost-saving program. Of course, more customers are shopping digitally in Argos. Now, 80% of the sales in Argos are happening digitally. That's enabling us to keep driving efficiency.
I'd take us back to the kind of core elements of our strategy, which is to reduce costs, improve margin discipline, make sure that we get the fundamentals of availability, you know, really optimize digital, our conversion really optimized. Obviously, as we take those costs out, you know, holding onto the sales. That's the way we're thinking about how that will play through on, you know, clearly a more challenging outlook on the top line. Then on food, I think, look, you know, first principle, we will maintain our relative position on price. We've worked hard to get to where we've got to. You can see what that means in terms of our volume position. As you say, you can see that we're inflating behind others.
As I said earlier to James' question, 1%-2% behind market inflation is where we are today, and putting the value where customers really notice it. Look, you know, we're of course are looking at what others are doing. You know, the food market we, you know, we think so far has been rational. You know, we're being prudent in our outlook on food. Obviously, we want to make sure we maintain our volume momentum, make sure that the value is really clear in the offer. You know, I would say again that, you know, the cost-saving program that we've built and we're now 18 months into is driving, one, a lot of momentum, and two, a lot of unique benefits in costs that we think we have that others don't have.
While the outlook is clearly more challenging to make sure we can deliver value, we think we've got a lot of tools in our armory to deploy as the year unfolds.
On the bank, Kevin?
Yeah. Rob, I'm not sure I fully understood your question, but I think there's two separate things here, the dividend and the profit. Profit, we think will increase this year, for a couple of factors. We think we'll have some disciplined increase in lending and credit cards and on the loan book. In areas like travel money, we'll have a much better year, not back to pre-COVID, but much improved. Those will contribute, and we're assuming a fairly balanced sort of bad debt environment, in that forecast. You know, they're not up enormously, but they'll be up year-over-year.
On the dividend discussion, you know, it was always our plan and our ambition to improve returns and pay a dividend, and that's something the bank board have been very focused on. You know, the conclusion was reached that the future plans for the next few years can be delivered. We can grow lending in a disciplined way, and at the same time distribute capital to the parent, which is what they've done. Of course it's important milestone both for the bank board and for us that we've seen that. That, that's kind of, if you like, connected but disconnected. Future dividends will be linked to sort of future profit growth as we see how things evolve as we come out of the COVID period.
Yeah. Maybe just the only other point to add, Rob, just in terms of the financial services proposition itself. Clearly, within the environment that we're in and, you know, your question on general merchandise, the teams have been working really hard end to end to make sure that we're improving the product proposition of financial services products to support things with Argos customers. So within the context of a more challenging GM outlook, you know, for example, the launch of our new monthly payment plan is a really key element of us serving, you know, the GM customer base more effectively in the way they wanna shop. But also, you know, taking, you know, advantage of our financial services platform to grow its performance as the consumer outlook changes.
Okay.
Thanks, Rob.
Appreciate it. Thanks.
Cheers, Rob.
Thank you. The next question is coming from James Grzinic, Jefferies International.
Hello, James. Good morning.
Yes.
Good morning.
Good morning. Good morning, Simon, Kevin, and James. I had a couple, I guess mostly for Kevin really on the financial side of things. Can you perhaps talk us through why you decided to increase the payout ratio rather than going for stepping up the rate of deleverage and then redeploying that optionality on exceptional cash distributions? Should we think that it's a signal of sustainably higher level free cash flow than you see in the business? And second one is, can you perhaps go again through the details of the GBP 800 million lease liability recapitalization that will unwind in two years' time?
Trying to understand the mechanics of that, 'cause obviously it makes a big difference in terms of the 3.1% is already 2.7% underlying on the average side.
Okay. No problem, James. Yeah. You've kind of answered the question, the first one you said. You're right. We felt that shareholders would appreciate a predictable improved dividend. If you think of the last number of years, I mean, we've made you know substantial progress in deleveraging the group. Of the GBP 2.8 billion of free cash flow that we've generated in the last five years, we've paid about 60% of it to pay down debt. We're fast approaching a situation where we don't need to pay that money out to pay down debt. Clearly we have excess free cash flow, and we felt the first port of call would be to increase the proportion of profits that we gave to shareholders.
It just, I think, demonstrates our confidence in the sustainability of the cash flow and the predictability, and shareholders can rely on that. Now, the other point I'd probably make, if you look at our allocation framework that we laid out on slide 24, we said, first and foremost, you know, invest in supporting our strategy and accelerating our strategy. Then a solid investment grade, 'cause we think that's really important, that gives us great financial flexibility to take advantage of opportunities as they arise and protect the business. Then thirdly would be, you know, improving the payout ratio. This year, we've said we will actually do it this year, even though we haven't technically hit the solid investment grade target.
That's just, I think, again, a sign of our kind of confidence in the ability of the group to continue to generate strong cash flow. Hopefully that helps on that front. On the GBP 800 million, we've got these two structures called Highbury and Dragon that were entered into many years ago. Leasing, there's about 26 stores in the structures. We're a joint venture, we have about 50% of the shareholding in that with another party. The way it was structured was if we stayed in the venture, we had two choices. We could either leave a store and just exit the lease at the end, or we could lease the store back, but we could only lease this on passing rent and on a 20-year lease.
Now, we looked at some of those stores and we thought, we don't think the passing rent is necessarily the right rent, and some of those stores, we don't necessarily want a 20-year lease on them. Because of the strength of the balance sheet now and the position we're in, we've exercised the option to actually acquire 21 of those stores. We're gonna leave some of the stores that we don't want. Then with those 21 stores, as we acquire them, we will retain a small handful because they're commercially interesting. It gives us some flexibility commercially or there's a mixed-use development opportunity.
There'll be a number of those that we'll hold on to, and we will sell and lease back the majority, but we'll do them on leases that we want, the right length, the right rent, et cetera, and the right terms on the lease. That will take the leases we can exercise and take action during 2023, but potentially where the process could take through till FY 2024 because there's gonna be some arbitration negotiation with the joint venture party on the price of some of these stores. We think the whole process will be completed by FY 2024, and then you'll see our leverage come down because a chunk of that GBP 800 million will be removed.
Thank you for that, Kevin. Very clear. Can I just ask what the net cash flow impact of buying out the freeholds relative to surrendering leases would be? What would be the net, aside from the GBP 800 million removal?
James, I can't give you that at this stage. There's gonna be some cash inflow from this process, but it all depends on it just depends on the number that we retain and the sale at the margin between the sale and the leaseback. Clearly, we're balancing. We're not trying to maximize property profit here. We're balancing property profit and having the right lease structures for, if you like, the next generation in 10 years' time. Clearly we could maximize cash today by putting 20-year leases at RPI on all of these stores. We're not gonna do that. We're just gonna get the right balance. We'll have to come back to you as we go through those negotiations and give you greater color, but there's no cash out.
There'll be a small amount of cash in, you know, but it'll just depend ultimately on the final lease structures.
Thank you. Can I just ask a super quick one follow-up on actually Argos, and perhaps if you can clarify what the rental line would be for Argos this year compared to the period that Rob was referencing back when we had a big squeeze on top line? 'Cause I presume it's very different now.
It is very different. I don't happen to have that number right now, but it's rates as well. I mean, you know, rates inflation has been higher than rent inflation for a number of years in Argos stores. James can come back with that later. It's clearly very material because we've put 400 stores inside Sainsbury's stores where we're, you know, we don't have additional rent and rates.
James, if it's helpful, on 55 of our presentation, you can see the key cost saving programs laid out and specifically with reference to the Argos transformation, both the store rationalization and fulfillment centers, but also as you can see, the big program in logistics, bringing together both Sainsbury's and Argos logistics. If we contrast that with the operating platform we had before, you can see, back to Rob's earlier question, just how much operating leverage is coming through as that cost program flows. As I say, still half of that to come.
James, maybe just building on Simon's point. You know, we take out the rent and rates of the stores. We go into our stores where we don't have any additional rent and rates, but we do put in a small amount of rent and rates in local fulfillment centers, but we're replacing retail rent, you know, a number of stores with one local fulfillment center on logistics, you know, sort of, shared rent.
Thank you, James.
Very well.
Thank you.
Thank you. The next question is coming from William Woods from Bernstein. Please proceed.
William, good morning.
Good morning.
Good morning.
A couple of questions just on pricing. Obviously, you're showing volume growth above the market, but from Kantar, your value market share is down. Are you seeing any changes in kind of customer behavior in terms of net switching gains, winning net switching gains from your peers? I suppose, secondly, on the hearts and minds of pricing, how is price perception changing for Sainsbury's as a result of price match and things like that? Then just a final point on price. Are you able to quantify the investment on price? Is it as simple as you're not passing on 1%-2% below the market and therefore it's 1%-2% sales? Thanks.
William, thank you. On your first question on what's happening on the share, I mean, we were very clear at the outset of our plan. We judge our performance on market share on volume, because that's the absolute clearly read of how much food people are buying, and it's also reflecting the value we're putting into the offer. That's why you can see our volume market share is growing where it is. Because we are inflating slower than others, in fact, on the 100 biggest SKUs, as you can see in our pack on 35 behind our direct competitors, you know, again, that's a key enabler of the volume market share growth versus value.
In terms of what we're seeing from customer behavior, I mean, I think as I I hope stressed early, you know, this isn't something that we started to do in recent days or weeks. This is something we've been working on for 18 months. We were really clear at the start of our food-first plan that we would be more competitive. Really the, you know, culmination of all the work over the last 18 months is meaning that, you know, more secondary customers are coming back into Sainsbury's, both from the other big four, but also from the discounters to shop into those products they can now be sure of the value at Sainsbury's. That's been something we've seen through the last year. You know, we saw it further pick up over peak.
You know, that's why we're absolutely determined that we will hold on to our relative value position and why the cost saving program is so key in doing that. The one thing I would say is that we are being very focused where we place the investment. You know, I think there's a lot of noise in the market at the moment. We're deploying our value where we hear from our customers they really wanna see it. As I said, that's in fruit and vegetables, that's in meat, that's in dairy products, in the items that go into the basket every week, bread, potatoes and so on. I think it's the real focus of the investment that's getting the cut-through, which means we can balance how much it's costing us and the return that we're getting on it.
In terms of, you know, the overall position against the market, like I've said before, we are holding back inflation, helped by our scale, helped by the relationships with suppliers, helped by the volume drive that we're putting in place, as I say, fundamentally underpinned by the cost saving program. In terms of what we're seeing on perception, just pointing to our pack for a minute, you'll see that one of the things we wanted to pull out for you is just what's happening in terms of customer feedback. When you look on 33 in the pack, what you can see there is that we are seeing value perception shift for the first time in a long while. These things, as you know, take a long time to move. Value perceptions are up on two years ago.
Interesting also in areas like Nectar pricing, when we give customers personalized value, the value perception shifts even more substantially. All the focus on maintaining what we're doing, all the focus on maintaining relative strength in our value offer and, you know, continuing to execute against what we're learning.
Great. Thank you.
Thank you, William.
Thanks, William.
Thank you. The next question is coming from Javier Deman from Bank of America Securities.
Yes, good morning. Two questions.
Morning, morning. Hi.
Morning. First on inflation. I understand exactly what you're doing for this year, but how do you see inflation, you know, going forward, so more mid to long term? Do you expect, you know, food inflation to stay for the long term? And linked to that, what do you make about Asda and Morrisons' recent announcement? Would you expect the competition to get potentially tougher? And is it part of your guidance? You said the market has been rational, but do you expect in your guidance the market to become potentially less rational? And last one, if I may, on the cost savings target that you've got, you know, 200 basis points for SG&A cost reduction.
Given the labor cost inflation, the energy cost inflation, do you think that the target is still achievable? What do you expect potentially for this year in terms of reduction?
Okay. Very well. Thank you. Well, if I take the questions on outlook on inflation and competitor, and then I'll hand over to Kevin. Look, I think I've a couple of things to say. Clearly, at the macro level, we can all see some of the drivers of inflation into food, you know, not least being amplified by the geopolitical events at the moment. You know, increased cost of production, you know, fertilizer, fuel. You know, I think these factors clearly are on everyone's mind. The impact of inflation, you know, I think we would expect to be over a longer period than we would have certainly seen two or three months ago.
I think you know, clearly within that, you know, as we have been working, we're doing everything we can to hold back the impact of inflation to the consumer through the combination of, you know, clearly working very hard with suppliers. You know, I have to say, through the pandemic, our supply base have done a fantastic job, and we're working day in, day out very closely with them. The commercial teams are doing, you know, a great job working really closely to make sure we can, you know, find the right balance on value but also support what we need to. You know, I would just say in certain areas, you know, we're really leaning into support. For example, on pork, you know, the UK pig industry, it's a challenging time at the moment.
We've looked at our model, we've changed it, we've invested further to support farmers there. The same in milk, the same in eggs. In the parts of the industry that are challenged, we're also doing what we need to be doing and doing the right thing to support against the context of this inflation environment more broadly. I think what it means when we look ahead is that it will last a bit longer, but our job is to continue to do what we're doing, which is to, as far as possible, ensure that we are passing less on to our customers than our competitors are, and to do that funded by our efficiencies and cost saving and scale. In terms of what that means for the competitors.
Look, as you'd expect, I'm not gonna speak about individual competitors and what they're doing, but I think, as I say, there's a lot of noise in the market on price and promotion. We can see some retailers using a lot more promotions. You know, we can see lots of prices moving around. In the end, I think customers are really savvy about these things, and they can see all of that. Our strategy and our plan is to make sure at the shelf edge, you can absolutely see consistently a trusted position on value that customers believe in. That doesn't mean it changes, you know, in January compared to the autumn. It means that throughout the year, on the products you wanna buy that matter most to you can trust our value.
That's one of the reasons why I think our volume share and our switch to secondary customers has been happening. Kevin, do you wanna pick up the second point?
Yeah, Javier Deman. I mean, we, you know, we're very, very focused on taking costs out so we can invest in the offer, and we've got detailed plans to do that. You're right in saying this, the environment has changed. You know, we didn't anticipate this level of inflation when we laid out the plan, that's for sure. In the current year, we will make further progress, but less than we would have originally thought because of the inflation. Our cost saving plans are very clear, but the inflation is higher than we anticipated. You'll see on slide 54, we still expect to make progress. We're very confident in our cost out plans. Then when we talk about the outer years, there's more to do. Obviously, you know, we're focused on delivering 2022, 2023 at the moment.
The only thing I'd point out is obviously a basis points movement. You know, there's two factors in there, as we all know. You know, what happens to the sales line and what happens to the cost line. While there'll be inflation in the cost line, we'd expect some inflation in the outer years in the sales line as well, which will come in the mix. We'll obviously talk in more detail as we get out of this year into next year.
Thank you. That's very helpful.
Thank you.
Thank you.
The next question is coming from Clive Black from Shore Capital.
Morning, Clive.
Morning, Clive.
Good morning, guys, UK. Can you hear me?
Good to hear your question, Clive.
Sorry. I'd like to just ask about online, which hasn't really been touched upon today, against the backdrop of a lot of noise in recent times. First of all, where do you see Sainsbury's online grocery participation going? And how does the evolution of the business involve your stores online in terms of business model for fulfillment going forward? In that respect, do you think online could be particularly vulnerable or otherwise in the general merchandising side of what's coming down the line? You mentioned being concerned from October in particular. Just as an adjunct to that, can you give us an indication of what proportion of your clothing sales are online, please? That would be great.
Thanks, Clive. Yeah, sure. Let's talk online. First of all, on the grocery side, and if it's helpful, just as everyone's looking at the results this morning, on 41 and 42, we've just tried to lay out in our pack what's been happening. To your question, Clive, specifically on participation, you can see, you know, when we got to a peak of north of 800,000 orders a week, that was north of 20% participation, and you can see, you know, through FY 2022, where that's got to a more stable position. You know, we exit the year around 15% compared to just ahead of 20% at the same point last year. What we would see here is, you know, a real return to store.
A lot of the customers that were shopping online are coming back into store as shopping trends normalize. You know, 15%, there or thereabouts for this year is you know, I think a decent planning assumption. You know, of course, over the longer term, to your second question, we'd expect this to increase. We think this is a good resting point for us because it means that we can continue to drive on 42, you know, the benefits of our in-store model, and, you know, whether that be on item pick rate per hour or drops per hour, van utilization, or indeed on our ability to, you know, to pick the basket size that customers are shopping into, you can see the efficiency benefits we're getting.
I think a more stable picture in terms of participation and, you know, a longer trajectory to grocery online participation increasing again, which I think to your second question then says, look, two key objectives here for us. One, how do we optimize, as I say, the store model and, you know, our teams are doing a fantastic job in this space to make sure we give, you know, improving service and good service and improve our productivity. Also at the same time, you know, really think about what's next. I think what it would say is that, of course, we've got to look at new fulfillment solutions and as you'd expect, we're looking at that all the time. I don't think the rush is on as much as it may have been 12 or 15 months ago.
I think that's a good thing because we can, you know, really drive our in-store model. We can take our time to work out the most efficient long-term solutions. You know, at its heart, we've got 600 supermarkets here, just under 300 that we fulfill online in. You know, we can optimize the use of those, you know, great locations to do a better job front of store and also back of store, too. Hopefully that gives you a picture on the online situation. In GM, I think, look, you know, clearly the outlook is more challenging for all the reasons we've discussed.
You know, in that context, I guess again, coming back to the situation in 2011, 2012, I think it's an advantage we've got such a developed online platform in Argos and in GM because it means that customers can get access much more readily than last time to where products are available and also can see value as well. In many ways, I think we've got to play that to our advantage. That's why we're so focused on availability right now and really focused on value too. You know, how do we use 80%+ of the sales in Argos coming digitally to our advantage, particularly in the context of customers wanting to, you know, pick up and get convenience quickly, and that's what we'll be doing in that space.
On clothing, hopefully in the pack, we've given some sense of what's happening on our clothing business. Just if you look at page 50, you can see how much the online sales have grown. Online clothing sales are 13% of the total sales now. They were 9% in 2019/2020. You can see the size of the growth that we're getting. We're encouraged with our clothing performance. You know, we've got a really strong offer in Tu. You can see how much the full price mix has continued to grow, and the team are, you know, really focused on how as customers come back into store, we continue to strengthen our clothing offer. Thanks, Clive.
The next question is coming from Andrew Porteous from HSBC.
Hello, Andrew. Good morning.
Morning, Andrew.
Hi, team. Thank you for taking the questions. A couple from me. Firstly, can you just talk a little bit about CapEx? I think you talked in a statement about GBP 700 million-GBP 750 million going forward. I know that was the plan for a few years, but I think your original guidance was for beyond 2024 for CapEx to drop back to GBP 600 million. Is that still the plan, or are we likely to see higher CapEx going beyond that? A second question, really, I guess, related to Clive's. Just when you're seeing that transfer of sales back into store from online, is that a net positive from a profit perspective for your business or not?
Yeah, thanks. Well, why doesn't Kevin pick up your first question, then we'll come back and talk about online. Kevin.
Yes, Andrew, that's right. We have raised the CapEx in our assumptions, in our plans going forward. We've kept it at the GBP 700 million-GBP 750 million level.
At the moment, the sort of a base level is around GBP 600 million and the additional CapEx is going on the Argos transformation and the logistics transformation largely. What we've assumed is, and I think for planning purposes and for cash flow planning purposes, that we maintain that level. A couple of factors there. One is just, you know, we would imagine that there'll be other areas of investing in the future as we digitize the business that we'd want to focus on. Two, there's gonna be some element of inflation in the underlying CapEx costs, and hence we think it's the right sort of level to ensure that we're, you know, maintaining both the physical and the digital infrastructure of the business and investing in the right areas.
We can still deliver GBP 500 million plus per year while doing that.
Thanks, Kevin. I think just in short to your second question, clearly, you know, customers fulfilling in store versus online is a positive outcome in terms of our ability to fulfill at lower cost. That's why we think the 15% gives us access, you know, to a whole lot of new customers shopping with us online. Also, as they come back into store, that improves the, you know, operating efficiency too.
Brilliant. Thank you for your answers, guys.
Thank you.
The next one is coming from Nick Coulter from Citi.
Good morning, Nick.
Hi. Good morning. Congratulations on the bank. I think cash out rather than cash in is indeed a watershed moment. Good to hear. Three, if I may, I'd pick up on the outlook comment around continuing your volume market share performance, and to what extent you'd expect to lose a greater level of switching to the discounters in this sort of environment. Appreciate their own space. That's the first one.
Yeah, sure, Nick. Thank you. Let me take that one. Look, I think, you know, I mean, the first and most obvious thing to say is, there's no room for complacency on anything right now, for all the obvious reasons, you know, very competitive market, and everyone's looking at their share and what they need to do to make sure it's where they want it to be. I guess my comments would be that, you know, our volume share gains have been the result of being bolder in our price investment decisions and where we've deployed them. And we would expect to, you know, be able to reinvest more than our competitors through the size of our cost saving program. We think we've got a substantial cost out still to go out, and that's very much in our plan this year.
I should say that, you know, we would expect our cost savings in our plan this year to be, you know, at a higher level of inflation. We'll take out more cost from the cost of inflation, which is, you know, a key measure of our ability to deliver on cost. You know, the other thing I would say is that, you know, we intend and are committed to be very consistent so that customers can see week in, week out, where there is value in the Sainsbury's shop. Absolutely no complacency against others. I'm sure there'll be lots happening in the market on price. There already is. We're just gonna absolutely stick to our plan and make sure our relative value continues to be really clear to customers.
You broadly expect the same shape of switching as you're seeing at the moment. A kind of a net win or hold, but obviously a mix versus competitors.
Yeah, well, I think in terms of my key point, which is we're gonna invest value in the parts of the shopping trip that ensure that customers, you know, continue to see the strength of the value in our offer. I think of course, you know, there'll be moves backwards and forwards as the offer moves in others, but that's our absolute objective. You know, we've built a plan and a forecast this year that underpins our ability to do that.
Okay, great. That's helpful. Thank you. Secondly, very broadly, what sort of price elasticity do you expect to see in your general merchandise category? It's not, I guess, the clothing category as well. I'd be interested to hear how you're thinking about this. I guess to follow on, how have you factored the results and volume considerations into the buying cycle, and also into your assortment, I guess, as you try to preserve price points? I would assume that peak planning is probably front and center at this point in time. Thank you.
Yeah, I mean, I think, you know, as you say, there's lots of factors here that we're obviously looking at, looking at the history, looking at the trends we're seeing from customers. Obviously, particularly in the market you mention in clothing, you know, we've seen a lot of customers come back into store, and obviously given the size of our clothing offer that, you know, comes from our physical footprint, you know, we're learning a lot about how customers are shopping that. I think, look, it's very early to say in terms of elasticity at this point in time. You know, as I said recently, you know, obviously lots of factors are driving, particularly general merchandise. Obviously, discretionary spending is a factor. Obviously, the weather in clothing is a factor, you know, big seasonal period ahead.
We're looking at all these factors as we plan the outlook for the year. You know, we think we've got a strong offer and at a time when customers are watching every penny and every pound in their purses and wallets, having a, you know, strong clothing offer that's based on good value is a good place to be, and it's one that, you know, we'll be deploying against. As we look towards the second half of the year, we'll learn a lot over the next two or three months, and we'll be making our choices for quarter three and peak as we see how the customer behavior changes.
Have you built any additional flexibility into your buying patterns for the year, given the lead times involved and given what's going down the track?
We have a pretty flexible model actually in the way that we do this. Obviously, our supply base we've developed over, you know, a long period of time. I mean, I would point you to how we've managed this through the, you know, the COVID period. You know, clearly we're placing you know our commitments, you know, a decent time out, but we are also being flexible and working closely with them to manage the situation as it happens.
At this point in time, I would say, you know, the key principles here are staying very close to customer behavior, making sure value is in the offer where it needs to be, most importantly of all, making sure we've got the right ranges and the right products that customers want to buy. We'll, you know, stay closely linked to how the demand curve moves and make sure we're responding accordingly.
Okay, that's helpful. Thank you.
Thank you.
The next question is coming from Sreedhar Mahamkali from UBS.
Hello, Sreedhar. Morning.
Morning, Sreedhar.
Good morning to both of you. Thanks for taking the questions. Maybe just a couple of super quick questions, please. You've talked about volume outperformance, fairly large volume of outperformance versus the big four. Maybe expand a little bit on that in terms of what does that do to your negotiations and leverage with suppliers? That's the first one. Secondly, how do you build from there? What's the path to value share gain? Like what's the lead times, and when do you start to see value share gain? The path, that'll be super helpful to talk through. Secondly, very quick follow-up on GM. We've talked quite a lot about sales and costs, but I think in the year gone, you also talked about gross margin being up in the segment.
Can you give us a sense in terms of how you're thinking about the drivers for gross margin for the year ahead in GM specifically, please? Thank you.
Okay, Sreedhar, thanks. Why don't I take the volume question, and then maybe Kevin take the GM, gross margin question. I think, without repeating myself, I think maybe just two points to state. I mean, the reason we're so focused on volume market share is clearly that's also a reflection of our relative value compared to others. You know, clearly, you wouldn't expect me to say that we would wanna grow our value share ahead of our volume share because we're so focused on getting our volume share, as our point of difference, more customers shopping with us. When we look to what's happening here with suppliers, couple of things to say. You know, we've a long-standing and trusted relationship with our supply base.
It's one of the things that I think makes Sainsbury's unique in the way we have built this over a long period of time. You know, our team, our commercial teams are spending a huge amount of time with our suppliers. I've spent a lot of time with our suppliers too this year, really understanding what they're trying to achieve, what we're trying to achieve. I think in the middle of that is really where, you know, our collaboration and partnership is really driving strategic value. Because as we make the Sainsbury's brand in food more resonant with customers, so we grow volume, and so we are able to also create value for our suppliers. You know, clearly as inflation is in mid-single digit in the industry, you know, there's more still to come through the pipe.
Because we're working so closely with our suppliers and because of our cost saving program, that's why we can, you know, make sure we're holding our prices back 1%-2% from that position. I think in terms of your outlook question here, Sreedhar, we intend to keep doing that. As I say, absolutely no complacency in our position, but a real determination to continue to leverage our scale, our supplier relationships, our commitment to value, and the delivery of our cost saving program, so that customers can keep being confident in the value they're gonna get when they shop with us. Kevin, do you wanna pick up the gross margin point?
Yeah, Sreedhar. Our working assumption on gross margin in general merchandise is that across the range, it'll be down slightly in the year as we sort of focus on affordability in one or two categories. However, it's small in the scheme of the volume is the big lever that, you know, we're more concerned about and, you know, is behind the sort of range of outcomes that we're talking about.
Thank you.
Thank you, Sreedhar.
Thank you. This was the last question for today.
If there aren't any more questions, look, just to say thank you everyone for your time this morning. I know as I say, it's a busy morning for you. Look, I hope you can see we're very focused on the consumer, very focused on our strategy 18 months in. I would just stress again, only one year into a three-year plan, you know, the whole team are really focused on how do we deliver the plan this year in what's gonna be a, you know, a different outlook to last year. I hope what you can see is we're focused on customers, and we're very focused on our shareholders too, and make sure that we can deliver for both of those key stakeholders this year with a team already behind that. We'll see you soon.
Thanks for joining us this morning, and thanks for your questions.
Thank you, Simon. The presentation has now ended.