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CNBC Interview with Sainsbury’s CFO, Kevin O’Byrne


Following is the transcript of a CNBC interview with Kevin O'Byrne, Sainsbury's CFO, CNBC's Steve Sedgwick, Karen Tso, and Geoff Cutmore.

SS: I'm delighted to say the CFO of J Sainsbury's, or Sainsbury's I should say, who has joined us now. Kevin, thank you very much indeed for joining us – very simple starting question: tell us the rationale from your point of view. Everyone else has chipped in on what the rationale is – you tell us what yours is.

KO: Well look, we think this is a great combination creating a very dynamic new player in the retail market. We think it's very good for customers, we think it's good for our colleagues and our teams in our stores, good for our suppliers and good for shareholders. So the rationale is very compelling.

SS: Kevin, when Terry Leahy was the behemoth of UK grocery, around about ten years ago, from 05 to 11, his market share was roughly what yours is going to be now with a combined Sainsbury and Asda as well, but he didn't have Aldi, he didn't have Lidl, Amazon or Ocado to face up to as well. For the regulators, is that the message? This is a very different 31% than what it was ten years ago when Tesco's had it.

KO: Well look, the market has changed beyond recognition hasn't it in the last ten years. Even in the last three years the discounters have doubled their share, we've got new entrants coming into the market that just couldn't exist a few years ago, and even if you go to one extreme you've got people like JustEat and Deliveroo that are serving food to customers which they may have bought in chains like ours a number of years ago. So the context is very different, the regulator's got a very important role to do to look after customers and protect customer's interests, and we've as you can imagine, done a lot of work on this over the last few months and we believe this is very good for consumers and we look forward to engaging with the regulator in that discussion.

KT: Kevin, we've been discussing some of the action on the high-street of late, the Tesco-Booker deal, your own deal to acquire Argos, and many of these moves used to bulk up look like defensive moves. Would you say this deal today with Asda is also defensive?

KO: Well clearly we think it's a very positive move but it is in the context of a very dynamic and changing retail market, and we think that if you don't change and you don't evolve, and you don't move forward, you know, in the current climate, then that that's very risky, so we think it's a very good move, we think as you say it allows us, particularly in a very competitive market, with online and with discounters, to give much greater value to our customers. And that's very important.

KT: Kevin, we've listened very closely to all the messages from the retailers about how they're tackling costs in what has been a very deflationary, price deflationary story, across the UK for many years, but now in this release you're talking about taking prices even lower, by about ten per cent on many of the products customers buy regularly, how can you again lower prices again by just being a bigger business when you've already been a large business, negotiating with the supply chain for many years?

KO: Well there's a number of areas where we can see we can get net synergies of totalling 500 million from this combination. When we put Argos stores inside Sainsbury's stores we can see real value and we can put Argos stores inside Asda stores and do exactly the same. There's all the products and services that we buy that we don't sell in our stores, like our media, etc, which we can buy together and buy better. Then of course you put the two, the buying books together of these two organisations, and what we're looking to do is harmonise the buying book and we think there will be material savings there which we can pass on to customers and deliver to the bottom line.

GC: Kevin you're going to get these questions a lot I guess with the general media but there is a suspicion that's been expressed already over the weekend that there are going to be significant job losses and that there will be an opportunity for you to raise money through property sales as you shift sites. Could you just confirm or deny those suggestions?

KO: This this is going to be a good transaction for our for our colleagues. Look, we're creating a very large, strong business, with a very strong balance sheet that will employ 330000 people in the UK. We have no plans because of this transaction to close stores, subject to discussions with the regulator, and we will run both businesses independently with their independent head offices. So, Asda will have a head office in Leeds, Sainsbury's will continue to have the head office in Holborn and we'll run them with separate management teams and separate chief executives. And then another key factor in this is is very good for pension holders - there's 300,000 pension holders who rely on Asda and Sainsbury's and their position is better after this transaction as well.

GC: The trend in the earnings, as as we've seen over recent years for the business to generate lower and lower returns in terms of capital employed here, you are reporting this morning a 2017, 2018 number at eight point four percent down from eight point eight percent from 2016, 2017. It seems long gone are the halcyon days of double digit returns on capital. Do you think that this deal will help you get back to those kind of numbers?

KO: Well the deal is definitely good for shareholders, but if you look at the results that we've announced this morning we've announced our full year results to March. Profits have increased, and in the second half we saw a material increase in profits, our cash flow is much stronger year on year up 35 percent. We have also seen more customers coming into our stores than this time last year. So it's a it's a good set of results that we've announced for the 12 months, but of course this transaction will allow us to improve that performance.

GC: Yes but your basic earnings per share number at thirteen point three pence is significantly off the seventeen point five pence you managed to deliver in 2016, 17 so that, the clear impression from the numbers is the momentum is coming out of the business.

KO: Well, actually…

GC: Can you, can you stop that?

KO: Well actually if you look in the first half of the year the profits did go backwards, in the second half of the year the profits went forwards 11 percent. So actually, we have very good momentum in the second half of the financial year and very good momentum coming into into the current year.

KT: Kevin, I want to ask you about shareholders because Qatar Investments Authority are your major shareholder with about twenty two per cent of the company – have you spoken to them about this deal with Asda, and do they intend to maintain or will they be diluted?

KO: We've spoken to them, as you can see in the statement this morning, they're supportive of the transaction and as far as their future intention, clearly I don't know. But they're supportive of the transaction.

SS: Are the politicians just out there for the soundbites at the moment Kevin, of course Vince Cable's been on it as well, I've seen various Labour politicians as well, Joe Clarke of course very concerned from Unite as well, but Vince Cable says 'even more concentrated local monopolies could be the case on the back of this as well'. Is he just plain wrong?

KO: Well, the CMA, the regulator, will clearly look at local competition and their role is very important role to look after customer choice as well at a local level and they'll look at it market by market, area by area, and make sure that that isn't the case.

SS: Andrew Simms of the New Weather Institute think-tank says 'this is profoundly not in the public interest, it's going to have negative consequences for consumers and along the grocery supply chain as well'. What kind of guarantees can you give to from the British farmers upwards to the wholesalers that this isn't going to detrimentally affect them Kevin?

KO: This, this will absolutely be good for UK consumers. This will lead to lower prices on the shelf for UK customers everyday, and then if we stand back and look at the supplier place, well people sometimes forget is that we have thousands of suppliers but a hundred suppliers, large multi-nationals make up eighty five percent of the products on our shelves, and we will work closely with those suppliers to ensure that we can bring better value to our UK customers.

SS: Sorry Kevin, I don't understand that when your margins are so under pressure. This is good for farmers and good for consumers?

KO: What what I was saying there is there are a hundred suppliers, the likes of all the big multinationals, make up eighty five per cent of the products on our shelves. So we'll be in discussions with those suppliers to ensure that we can give great value and improved value to UK customers.

KT: Kevin, in the statement you're saying there are no plans in Sainsbury's or Asda store closures as a result of the combination which is somewhat extraordinary given this huge pivot towards online. Where is the online strategy in this deal?

KO: Yes of course we'll be combining our great digital strategy in Argos, our online grocery businesses in both Asda and Sainsbury's will progress, but online grocery is a much smaller, it's about seven percent of the market, so it's a much smaller part of the market than some of the other general merchandise and clothing markets that you'll be familiar with. So there's still the majority of people still buy their weekly groceries in either a convenience store or supermarket, and hence our plans to keep all the stores.

KT: Kevin, you've got a busy day ahead – a lot of people to speak to – thank you so much for joining us First up on Squawk Box.


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