Sainsbury's (JSNSF) CEO Mike Coupe on Q2 2016 Trading Update (Transcript)

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J Sainsbury plc (OTCQX:JSNSF) Q2 2016 Trading Update Call September 28, 2016 3:30 AM ET

Executives

Mike Coupe - Chief Executive Officer, Executive Director

Ed Barker - Interim Chief Financial Officer

Analysts

Bruno Monteyne - Bernstein

Niamh McSherry - Deutsche Bank

Andrew Gwynn - Exane

David McCarthy - HSBC

Edouard Aubin - Morgan Stanley

Rob Joyce - Goldman Sachs

Stewart McGuire - Credit Suisse

Sreedhar Mahamkali - Macquarie

Kiranjot Grewal - Bank of America Merrill Lynch

James Tracey - Redburn

Darren Shirley - Shore Capital

Nick Coulter - Citi

Operator

Welcome ladies and gentlemen to the Q2 2016 to 2017 Analyst Call with your host Mike Coupe. Please go ahead.

Mike Coupe

Good morning everyone and welcome to the quarter two Sainsbury's Trading Update Call. I'm joined by Ed Barker, our Interim CFO. As you are aware John Rogers has moved to a new role as the CEO of Sainsbury Argos. As we will run through the highlights and then I'll hand over the call for the Q&A. Ed?

Ed Barker

Thanks Mike. Good morning everyone and I will take you through the financial highlights for the second quarter. We've made continued good progress against the strategy we set out in November 2014. Total ex-fuel sales were down 0.4% in the quarter, like-for-like ex-fuel sales were down 1.1% reflecting of course food price deflation which we are measuring at around minus 1% in the quarter. And we achieved again like-for-like transaction growth across all of our channels so that's supermarkets, convenience and online, and total volume across the business are also up year-on-year.

We've also made targeted further price investment in everyday low prices with another round of price cuts at the end of August focusing on those products that matters most to our customers. We continue to invest in the quality of our products; and earlier this month, we launched our new On the Go range of sandwiches, salads, sushi, snacks and drinks. General merchandise has grown over 4% and the bank continues to deliver a good performance. Convenience and online both performed well, convenience growing nearly 7% and online growing 8% with orders growing close to 12%. And of course, we completed the acquisition of the Home Retail Group on the 2nd of September.

Although Sainsbury's did not own the business, we are announcing today the Argos second quarter performance for the 13 weeks to the 27th of August. Total sales growth of 3% and like-for-like growth of 2.3%, both of those of course ex-VAT numbers. As you can appreciate, we've only owned the business for just over three weeks now, and the period we're referring to there is a period before we took ownership of the business. And with time, we'll give you more detail on our thoughts and plans for Argos and the wider GM business, but we're not going to see anything more on the performance today. We will have 30 Argos digital stores within Sainsbury's stores by Christmas. We'll also have 200 digital store collection points, Click & Collect points within our supermarkets by Christmas and we'll have five mini habitats in our supermarkets probably by yearend rather than just Christmas.

Finally, but importantly, our in-store operational metrics continue to improve. And we'll recognize by winning the Grocer 33 service and availability awards for the fourth consecutive year. So overall a solid performance for the first half, continued execution of our strategy.

And with that, I will hand over now to questions.

Question-and-Answer Session

Operator

Thank you. Your question-and-answer session will now begin. [Operator Instructions] And the first question comes from the line of Bruno Monteyne from Bernstein. Please go ahead.

Bruno Monteyne

Two questions from me. So there is volume growth in the UK market; I guess most stores are about 1% to 3%. And there's not that much space coming in; you're having a small negative volume like-for-like. So my first question really is why your volumes are below the market? And who are people switching to if that's the case, say if you compare that performance versus Morrisons and Tesco? My second question is around your different approach to promotions. It's been quite radical and persistent for the last year; less promotional, simpler, clearer pricing, no more multi-buys. But is there a risk that the consumer got used to that? And by you guys leading the market, you're losing out on potential volume and trade?

Mike Coupe

Yes, on the market performance, we'd standby what we said previously if we look at our market share over, let's say, the last year, we're the only one of the big grocers broadly speaking to have maintained market share. So, we're pretty pleased with that performance of course there're ups and downs in any given quarter, that's always been the case. And we've also highlighted the fact again as you've pointed out that we've seen volume growth during the quarter, we've also seen transaction growth. So, these things bounce around as they always do, people tend to fixate on the quarters but we'll standby our track record of outperforming the market consistently, not just in the last year but actually over the last four, five, six, seven years.

As far as promotions are concerned, we've seen the promotional participation in the quarter around 25%. It's a little bit high than the previous quarter, but if you look at the sort of previous year trends, you'd see a step up most summers in that promotional performance, and we again will standby what we say we'll do which is to continue to invest in everyday low prices. We think that's an important part of our long-term strategy. And that's something that we have done consistently now for probably about three years. And of course all the time, we're asking question that you've asked which is; where is the boundary? And clearly, it has different impacts on different categories.

We've also taken a lot of the promotional noise out of our business. So, again, if you look at over the last year, reduced the number of Nectar point; taking out Brand Match; reducing the number of multi buys. All of those things to your point are quite radical moves, but we think it is right to move the business towards the longer term, more sustainable price position, and in particular to close the price gap relative to the discounters and that's what we're focused on doing.

Bruno Monteyne

So, coming back on that first point then, indeed, I understand on a longer-term picture, Sainsbury's done fantastically well and so the last quarter of data doesn't unduly worry you is basically your message there; it has to be seen in the broader perspective. Is that the right way of summarizing your view on that?

Mike Coupe

That's the right way of summarizing, but even in the last quarter, you take the last 12 weeks, Tesco have done a little bit better than we've done. But, actually, we've been second in terms of overall market share position. So, these things do bounce around. There are other businesses in various particular cycles of recovery. But actually if you go back to the underlying point, this isn't a sprint, it's a marathon. It's a long-term game. We standby by our track record over many years, of course in any given quarter, there'll be ups and downs.

Ed Barker

Yes, Bruno also useful, probably just to break out a little bit more our Q2 number. So the Q2 like-for-like at minus 1.1 versus the 0.8 in Q1, so it's slightly down. But food price deflation, we're still measuring at around 1% as part of that, probably slightly higher in Q2 than in Q1. And non-food of course a little bit slower in the quarter given the impact on clothing particularly that we’re reporting today. So from this, you should be able to work out that our like-for-like volume performance overall, and for food specifically was probably slightly better in Q2 than in Q1, but still very slightly negative.

Operator

Thank you for your question there. Your next question comes from the line of Niamh McSherry from Deutsche Bank. Please go ahead.

Niamh McSherry

I just had a very easy one on contribution from space, which at 0.7% was below your full-year guidance and below last quarter. So is the guidance of about 1% for the year is still in place? Should we expect the contribution from your space to accelerate in H2?

Unidentified Company Representative

So, we’ll update more fully at the interims Niamh, but you have to remember that we’re little uncertain on the timing of selling our pharmacy business. And of course the pharmacy business sale has come out that happens about three or four weeks before the year-end, that will have an adverse effect on that new space number. But we’ll update you at the interims of outlook for the full year.

Operator

Your next question comes from the line of Andrew Gwynn from Exane. Please go ahead.

Andrew Gwynn

I'll be the bull that asks about consensus then. So consensus for the full year and the consensus in the first half, just wondering if you've got any views, or loosely where people are or where we should be?

Mike Coupe

This is a quarter two trading update, you know that we’ve got our interims in five or six weeks and we’re fully aware of any responsibilities we have. So, we can go no further than that and would go no further than that on a trading curve.

Ed Barker

Yes, I think the only thing that we would add is the consensus on our website was code compliant, up until the transaction date. So it's very up-to-date. And the only other thing to point out is that, consensus is Sainsbury’s only consensus.

Andrew Gwynn

And that says 517…

Ed Barker

That’s what the average of the ranges currently, yes, up on the website, quite a wide range around that.

Andrew Gwynn

Yes, yes. Just on a broader question then, market conditions, you've obviously mentioned a little bit of your own price investment at the end of August. Is there anything exciting going on in the market at the moment? Obviously, we've heard some noise from ASDA, but not really much action as far as we can see certainly. I was just wondering what your take of the market is at present.

Mike Coupe

I think it's a continuation of the trends that we’ve seen, not just in the last year, but probably the last two or three years now. The market continues to be in a deflationary cycle. The volumes have already been observed, have come back to the market in terms of a little bit of volume growth. But that’s a sort of critical dynamic that's driven the underlying challenges of the industry. But it doesn’t feel like and things have radically changed from where we were in the last quarter, certainly nothing that we’ve seen that would indicate that there is a radical shift in strategy of any of our major competitors.

Andrew Gwynn

And just sorry, finally, on Argos. When are you going to be in a position to communicate more? You said you would. Just wondering if you can give a timescale, should we wait until the full-year results; or are you going to say more at the half-year?

Mike Coupe

You understand that where we’re in three-and-half weeks in to owning the business, so very early days. And we’ve obviously given quite a lot of detail if you go all the prospectuses around and some of our intentions, so refer you back to some of the documentations already out there. But we will give a much more detailed overview of our intentions when we get to our interims in November. So, five or six weeks down the track, that’s all you have to wait. And as you can understand, as I say, we’re already three weeks into owning the business, so very early days.

Operator

Thank you. Your next question comes from the line of David McCarthy from HSBC. Please go ahead.

David McCarthy

Just a couple of things, one is you say you're uncertain on the impact of sterling. Can you explain where your uncertainty lies? Is it around the extent of the increasing costs that it's going to bring? Is it around your ability to pass it on? And are you more uncertain around the supermarkets than around Argos? And then a second question, can you give us any update on the operating cost inflation situation? Is that the same as you've guided previously, and are we going to be living with adverse differential inflation going forward throughout the rest of this year?

Mike Coupe

I'll have a go at the first bit, and Ed can have a go at the second, but I guess without being glib, Dave, and all of the above in terms of your list. And, first of all clearly currency movements have an influence on import prices, but equally you can see that there is some commodity market shifts as well. So if you take fuel as a good example, a kind of real example; although there was a devaluation of the pound. You also saw oil prices fall and therefore the kind of subsequent increase slight increase in fuel prices was no way near as highs as you might have expected on the basis of the devaluation of the pound. And you've seen this year, the harvests look like they are going to be pretty good. So, it looks like there is a downward pressure on commodities like wheat.

So, again not necessary and offsetting completely the inflationary effects of the pound to dollar exchange rate but nevertheless having some mitigation. I read in the newspaper this morning that the price of coffee is going to go up. So the other way, there are going to be prices on the upside. And of course to your point and any pressures either way, it's difficult to tell until it happens as and when these things will get past onto consumers, as I say, whether it's on the downside or the upside. So, I think it is uncertain, I don't think and any of us could put our hands on the hearts and give you any sense of predicting what and may not happen over the next period of time. But I don’t think, it's purely about or it isn’t just purely about the effect of exchange rate. There are other factors, not least the movement of commodity prices which will have an influence.

David McCarthy

So what about the impact on Argos then? Because presumably, that's going to be a little bit more certain in that you haven't got the vagaries of the commodity prices and harvest.

Mike Coupe

Well, I think and I'll refer you back to the statement that was made by their business at the time, so if you want to look out what John Walden and Richard Ashton said about their position on hedging. I think they were pretty clear, and of course whatever applies to Argos also applies to the rest of the marketplace. So the idea that Argos is somehow different to any of its competitors in terms of the impact to that any form of currency movements they have just isn’t true. I mean, it isn't factually right.

So, I would just I'd say, point you to the statement it was made by Argos themselves. And pre the transaction and firstly and secondly whatever flat pressures there are in whichever way whichever direction aren’t just exclusive to Argos; they would be exclusive -- they would be also applying to the other places of the marketplace. And as we said already, we will give you more color when we get to the interims. And so, we will be in a position hopefully to give you a bit more explanation beyond what we've put in the prospectus about our intentions and how we intend to execute and how that will play out over the next period of time.

David McCarthy

Okay, thanks.

Ed Barker

In relation to your second question, Dave, we're not going to be updating guidance or commenting on profitability as you've said, trading statement only. Today, we'll update on that at interims. And, therefore refer you back to the guidance that we gave at prelims where cost inflation was expected to be at the lower end of that 2% to 3% range.

David McCarthy

So you do anticipate adverse differential inflation continuing then therefore?

Ed Barker

Well, until we update at interims for any further information would stick to the cost inflation. Yes, we will have a cost inflation coming through at the bottom end of that 2% to 3% range.

Operator

Thank you for your question Dave. Your next question comes from Edouard Aubin from Morgan Stanley. Please go ahead.

Edouard Aubin

Just two questions for me. First of all, on convenience, I think, Mike, in the first quarter, you mentioned that like-for-like turned slightly negative for the first time in a while. Was that the case as well in Q2, are they negative as well? And my second question, I know you don't want to talk about Argos, but just a technical question. Have you changed the way you calculate your like-for-like sales there? I ask a question because the net used space boosted sales by around 2.8% on average over the past few quarters as you rolled out or as Argos rolled out concessions. And this quarter, it looks like the benefit was only 0.7%. So is that due to closure of the confession at home base or is that due to a change in methodology?

Mike Coupe

Well, I'll answer the first, and Ed can answer the second. So convenience like-for-like were positive in quarter two, up 0.6% against down 0.7% in quarter one. So relatively speaking, the convenience business did better than it had in the first quarter.

Ed Barker

Yes, and in relation to your second question, no change in calculations as part of that. And again, we're not going to comment on the Argos performance, but I would just refer you back to their Q2 last year, you'll see that there was a really big space put down in their Q2 last year in terms of the number of in-store concessions that were opened, and that will probably have the major effect on what you're seeing as the switch between new space.

Operator

Thank you for your question there. Your next question comes from the line of Rob Joyce from Goldman Sachs. Please go ahead.

Rob Joyce

Just got three areas from me, should be brief. Inflation-wise, are you seeing on the food side any cost price inflation or less deflation? And does that mean that, if so, your higher level of deflation this period means you're investing a bit more in price?

Mike Coupe

And we don't, again, break out the specifics of our price investment and now refer you back to what I said earlier. I mean there are movements in both directions on commodity prices and clearly exchange rate have an influence on that. And we'll see how that plays out over the next period of time both in terms of cost price pressures either way and subsequent retail movements on the back of them. So, you can see from what we said, the broadly speaking the business is tracking where it was in quarter one. I don't think there're any significant movements that I'll point at. And I certainly wouldn't take it that we've invested kind of above and beyond our normal rate of investment on price.

Rob Joyce

And then other two quick ones. In online, have you seen any kind of discernible impact from Amazon? And then just on Argos for the quarter, are you able to break out the price volume in that 2.3% like-for-like?

Mike Coupe

Well, I'll do the online piece and I'll probably give you the same answer, we've given already on Argos which is -- we've been very kind that we've actually given your quarter trading update. But -- and that we're only three weeks in, we'll give more color when we get to our interims in five or six weeks time. So, I beg your indulgence. Please be patient with us. We can't talk about in any more detail. As far as online is concerned 8% headline sales growth, 12% volume growth, and nothing that we can see in the numbers that has impacted as far as the Amazon position is concerned. We're continuing to execute what we said we'll execute before. We now have same day delivery in eight shops; we're rolling out Click & Collect to 200 shops.

Perhaps the most significant use for us in the quarters that we've successfully opened our Bromley-by-Bow online picking center which will enable us to increase capacity in London and that ensures that we can get growth in what is now probably the most highly penetrated online grocery market, well certainly in the UK as not the world. So, that gives us capacity for the future which is a very important part of our growth aspirations for that business. But nothing -- the direct answer to your question is, we can't do anything in our numbers which should lead us to think that in any way, shape, performance Amazon impacted us.

Operator

Thank you for your question there. Your next question comes from the line of Stewart McGuire from Credit Suisse. Please go ahead. You're live on the call.

Stewart McGuire

One follow-up and a couple of questions from me. I'm struggling a little bit with the convenience. It grew 7% you said. You opened nine stores out of 783 stores. But like-for-likes were only up 0.6%. Can you just tell me how you calculate that 7% growth? That's question number one. And question number two, on online, 8% sales growth, 12% order growth. Can you give us an indication on size of the online basket? Obviously, it's trending down. Where are you? And then finally, on your multi-buy strategy, you said that you wanted to end them entirely by August. But now you're at the vast majority of multi-buys removed. Do you still expect to remove all of them? Or is there some back-tracking there? Thanks. And that's it.

Mike Coupe

Yes, I mean that I'm trying to work out which order. I mean the convenience numbers are as they are. I mean I'm not sure that there's a lot more I can say. It is 7% growth. We haven't changed in any way, shape or form, the way that we report things. And I would suspect that's a reflection of the number of stores that we opened quarter-on-quarter. So, I'll ask the guys to update you on specifics, but clearly last year we opened in total 69 during the course of the year. This year, we'll open less and therefore I suspect the phasing difference that you're talking about is a reflection of the timing of openings. But there is nothing sinister in the way that we reported, it is identical to the way that we’ve always reported it. So, I am sure that after the call we can give you a bit more color and exactly how that number is calculated.

The second point, yes, basket size in online continue to drop by implications. They’re dropping by about 4% given the difference in the online order growth and the actual online revenue growth. And that’s the function of the fact that delivery parts, penetration continues to rise. It’s a great thing from a customer point of view, but of course it means that they can shop more frequently effectively for free. So that’s what they chose to do. And clearly things like Click & Collect also have some influence on basket size. So we’ve seen the slight slowing down as a reduction in trend, or reducing trend. I suspect over time that would begin to flatten out, but I think that will probably still be the case so let's say the next 12 to 18 months.

As far as multi-buyers are concerned, we just have to be slightly careful that we aren’t called to task to running things like buy six on alcohols. So when we do a wine promotion buy six, say 25% that is technically a multi-buy. So there are few of those types of things that we caveat what we said by. But what we’re talking about is a sort of in terms of our general day-to-day trading. We have eliminated all of the multi-buys in our business. So, it is purely around giving ourselves a little bit of wiggle room to make sure that we don’t end up with a headline that we are running multi-buys in some categories at some periods of time. And we just want to make sure that we don’t make ourselves a hostage to fortune.

Stewart McGuire

Thanks, Mike. Just one quick follow-up on the Delivery Pass, can you give us an idea of what percentage of customers have Delivery Passes; and maybe also give us your average basket size for online?

Mike Coupe

I don't think we quote the average basket size. I am now looking around the room. And we will get back to you on the first question. I don’t have the number -- I used to know what it was, I don’t have the number on top of my head. I know the penetration is increased. So I apologize. If we can give you the number, we will.

Operator

Thank you for your question there. Your next question comes from the line of Sreedhar Mahamkali from Macquarie. Please go ahead.

Sreedhar Mahamkali

So couple of questions from me, please. I think again just harking back to the first question where we started the promotion strategy. Can you actually say if that change in strategy -- it's been gradual, but I think certainly, you've stepped up over the past few quarters, has that actually impacted volumes negatively? And how do you -- give us a sense into how you'll deal with that impact. Is that something you'd annualize in a year and you'll move on? Should that negative volume continue to persist, would you need to revisit that balance in terms of multi-buys versus everyday low prices? Just talk us through that balance please, first one. And second one, you talk about outperformance, continuing to outperform the major peers is what your strategy is enabling you to do. Just clarify that outperformance. Is that based on total sales rather than like for like? Just help us understand that comment, outperformance, please.

Mike Coupe

On the first, actually we’ve seen volume growth in the quarter. We actually saw a slight volume decline in the previous quarter. So, our analysis would suggest that what we’ve done on not just removing multi-buys but also of course investing in underlying base prices hasn’t had a material impact on overall volume. Clearly, it has an impact on a category-by-category basis, and that’s part of the learning process that you go through. I think again we said publicly that we won’t be hidebound by a particular number that we’re aiming for. What we’ll do is continue to look to refine on a holistic basis but also on a category by category basis, a combination of where we chose to promote and where we chose to price invest. And we know and we learn continually about the best price investments for our business and how we home that overall balance.

It’s fair to say if you look at what we’ve done in the last year, we have made some quite radical changes. So, whether it's reducing Nectar points, whether it's taking out Brand Match, whether it's reducing multi-buys and investing, reinvesting that back into underlying price. We will continue to move in that general direction whilst being mindful of that balance that you’ve already highlighted that you need to strike between maintaining volume growth and getting to a sustainable and competitive platform for the medium to long-term. So, the promotional participation of course is about 25% it was 23 in the previous quarter, but actually if you look historically that's step up a little bit in the summer so that's more reflective of the reflection as seasonal trends rather than and something was changed about our underlying strategy.

Sreedhar Mahamkali

What was it in Q2 last year, Mike, if you have that number to hand in terms of promotional participation, the 25% this.

Mike Coupe

It was 31 last year.

Sreedhar Mahamkali

31%. And the outperformance comment?

Mike Coupe

So, on outperformance, I am looking at the market share data. If you look at our market share over the last year and remembering this is a marathon not a sprint. We broadly speaking maintained our market share and certainly all of our mainstream competitors are the big three others have all lost in various levels of market share. And even on the 12 week basis, as on latest quarter, broadly speaking we're second. Tesco have done a little bit better, but I'll refer to what I said earlier in the end, we're in this for the long-term. We stand by our track record of outperforming the markets. And year-on-year, probably now the last six, seven, eight years, so and that's the measure that we would look at. And of course, I would point to the fact that we have been pretty consistent in our performance and perhaps some of our competitors have been less consistent, and therefore, might be starting from a slightly different start point.

Sreedhar Mahamkali

Just to pick your brains, do you think the like-for-like outperformance is more important or overall total sales and total market share is more important?

Mike Coupe

And well, and we could have a very long debate about it, and so you guys in particular stole on like-for-like and performance, and I would argue that as we look forward that particular measure becomes increasingly meaningless in the sense that and I expect even today and people may choose to report it from probably due to its report in different ways for the quarter in the world that we are describing where you've got Click & Collect, you've got online deliveries to home. And you've got an increasing penetration of various delivery mechanics and of course in our business with the overall of Argos. And although top of Argos, this business is both online and half of that is Click & Collect in stores. Now, is that online growth? Is it like-for-like growth? How do we treat an Argos concession in a Sainsbury' store?

All of these issues are issues that will need to articulate more clearly to you when we get to our presentation in November to our interim. So, and I would suggest that increasingly headline sales growth is the measure of that you guys need to look at, and certainly I would point out as being a measure, an ultimate measure of our performance. Because I knew it, you can see it in some of our competitors where there would be massive space closures clearly that has a level of consolidation which leads to and effectively boosting the like-for-like. These are the kind of issues which kind of get and forgive when you start getting into just obsessing about like-for-like sales. So I would suggest overtime, I would point to the headline sales growth to the total sales growth as being the most meaningful measure.

Operator

Thank you for your question. Your question comes from the line of Kiranjot Grewal from Bank of America Merrill Lynch. Please go ahead.

Kiranjot Grewal

You made some comments on the price gap, having never been smaller across the Big 4. Could you give us some details on where you sit versus the others? And also following on, where's the price gap today versus the discounters? Thanks.

Mike Coupe

Yes, we have again talked specifically about the numbers my standby what we've said today and what we've said previously. First of all, our price position has never been sharper and that's consistently and being the case, during this quarter and during this financial year; and secondly the corridor is that's the way of putting it between the Big 4 Grocers has never been tighter. And you can see, it's not necessary the most scientific price survey, but we did that actually win the Grocer 33 price survey this week. And that's not happened for a while, but that is actually a reflection of the fact that we are and pretty comfortable with our price position relative to our mainstream competitors.

And we've talked on this call previously that if you kind of go back a few years, you would articulate the price gap between ourselves and the discounters and let's say for the fact that of this conversation around 25%. We would say that gap is now as the order 15%, but of course you could and put together a basket of one extreme that would show us being cheaper than the discounters, if you looked at our basics range. And equally, we know, it was publicly reported that the discounters themselves chose a different basket, which would show the gap to be wider. So all of these things have opened some form of interpretation, but in the way that we'll measure it. We would say that our price position relative to the discounters. That's closed reasonably significantly over the last couple of years and that's a reflection of the targeted price investments that we've made.

Operator

Thank you for your question there. Your next question comes from the line of James Tracey from Redburn. Please go ahead.

James Tracey

Two questions from me; the first one is for Mike. You mentioned the importance of looking at the headline sales instead of like-for-like. I've done some approximations and if you look at the core business and strip out online and convenience, total sales in the core declined by 1.8% in the quarter, and they've been falling for about 2.5 years or so. So do you see an end to that trend of growth in online and convenience, the declines in the core? And the second question is around the pension deficit. So discount rates appear to have come down around 100 basis points, which would imply a 1.7 billion increase in the liabilities. Is that a reasonable estimation? Thank you.

Mike Coupe

Well, I'll go on the first and then I'll pass to my colleague on my right for the second. Yes, again we've been pretty upfront when we laid our strategy in November 2014. We were very clearly that over time we would expect that supermarket volumes would decline. The online would increase. The convenience would increase and indeed that the market shares as discounters would increase too around about 15% share over five or six years. There's nothing in our current analysis that would change from that point of view. In fact and I would suggest that what we said in November 2014 is playing out to be remarkably accurate plus or minus maybe 1% or 2% in either direction. So, it's absolutely true, we're planning on the basis that our underlying core supermarket volumes and sales will decline over a period of time.

Of course all other things that we're putting in place, improving our price competitiveness, making sure that we improve the quality of the products that we focus on areas where we can differentiate particularly around our service, products availability, and in-store standards. We'll continue to do so to mitigate that loss and as I've already suggested, if you take the last year and broadly speaking, we've maintained their market share. So on the face of it, we seem to be doing a reasonable job of that whilst expecting that the market is changing; and therefore, we need to adapt to change in customers' behavior and habits. And that's why things like same-day delivery, rolling out Click & Collection online, the acquisition of Argos and the Home Retail Group play into to the future of this business. And that's the balancing act that we're always trading. But your underlying analysis, I haven't actually back-solved the arithmetic, but you won't be far out in terms of the analysis that you've made. I'll handover to Ed to talk about pensions.

Ed Barker

Lovely. Thank you. So, I think first point to distinguish James is, there were two things going on. We have an actuarial valuation which is our tri-annual valuation, takes place every three years. And that really derives the cash that we're going to be paying into the pension scheme. Our tri-annual strike date was March 2015, and we hope to be able to announce the results of that, come our interims. But that drives the cash that funds the pension scheme. I think what you're referring to is probably the accounting deficit, the accounting deficit is updated every reporting date. So, we will have a next strike date of the 24th of September. For that -- and that will take into account a movement in both assets and in liabilities that we've put some sensitivities around that, which I'm sure you're referring to within our year end accounts. And it's difficult to judge what the movement in assets and liabilities has been, they've moved in different directions. But again, we'll be reporting on that come the interims, once we've gone through the full valuation process.

Operator

Thank you. Your next question then comes from the line of Darren Shirley from Shore Capital. Please go ahead.

Clive Black

It's Clive. And Darren's here too. Just in terms of just really more subjective questions, gentlemen. Firstly, just on the differential in price versus the discounters. Mike, do you have an aspiration in that respect, given the magnitude of the progress you've made over the last year? The second question was just what you felt about the cost of servicing online orders, given what you said about Delivery Pass as a free shopping issue for shoppers? Because I sense the industry was trying to introduce more rationality in terms of the cost of fulfillment and maybe that's going back a step again. Is that a big issue down the line how you break that? And then thirdly, just what your customers view -- what feedback do you get directly from your customers of the step down in promotional activity? What are they actually saying to you in terms of how the stores look; the theater, the color, the offers versus more mainstream, but, at times can be more dull EDLP please?

Mike Coupe

I mean, I’ve got all of them. I am sure Ed will chip in this, if there is anything to add. I think without getting into too much detail, if you look at our developed markets where you've seen kind of stemming of discounter growth, you probably need to see a price gap of somewhere between 5% and 10% of that order of magnitude. So, you’ve made the observation not just us but our mainstream competitors are all tackling that particular issue in a slightly different way, I think that in and of itself creates an interesting dynamic in the market and perhaps a slightly more challenging environment as we can see for the discounters themselves. So I would suggest that you need to get to back to kind of position overtime, it's not something you can do overnight for obvious reasons. But we will continue down the road of targeted price investment of looking for the opportunities as and when they arrive.

And clearly, you can see in some categories, nappies would be a good example recently. There is a bit of a turf war going on where people understand the sensitivity of very specific lines. In terms of the online business, I guess there are two things you could observe in the marketplace. One, you’ve already referred to there is a degree of rationality around slot pricing, and you could argue that there’ve been a few moves by some of the players in the marketplace to perhaps bring a slightly more sensible approach to slot pricing, which clearly improves if that’s the right word putting the underlying profitability of the business. But secondly, there is an element of self help, so if you take out as a specific, we’ve invested quite a lot of money in online picking system in the last year. And indeed in online reaching systems which means that there is a quite lot self help going on.

And if we look at our online picking efficiency in our shops in our delivery and drop densities, actually there is a slight advantage for a specialist picking center, but not much. So, there is -- you could argue both sides of the equation are gradually kind of working their way to a sensible and rational position. As far as customer measures are concerned, one of the things which is and particularly encouraging from where we stand is that, we’ve seen our customer satisfaction index, which is an independently monitored customer measure, actually improve not just overall but also on underlying pricing.

So, certainly the measures that we would look at within our business, the external measures would suggest that our customers like what we're doing. They like the simplicity we’ve laid the commentary before around the fact that our customers would say to us that they don’t want a math degree in order to be able to do their shopping, and in that sense, simplified pricing works. But you’re right, we’ve got the part of the equation that we have to be mindful of is that, it does create a buzz in the stores. And so overtime, we’re trying to find the sweet spot as we’ve discussed earlier between underlying EDLP and making sure that there are some excitements in the overall mix and the overall offering, we’ll continue to do that. Whilst accepting, so the general direction in fact we will be to invest in underlying pricing particularly in line, which are discount pricing.

Clive Black

Thank you for that. And just to come back on one point, on the pricing differentials again; do you sense that you've made structural progress more so in the pence rather than percentage differential on fresh food that almost won't be -- there will no going back in that respect? I mean fresh produce, fresh meat, that sort of thing versus the discounters.

Mike Coupe

Yes, I mean, again, we talked around targeted price investments and clearly if you look at some of the things that we’ve pointed out today investments in underlying protein meat, beef, chicken, food and veg have been pretty significant over the last period of time. And that’s been one of the areas where we’ve invested reasonable amounts of money. And we’ve seen volume reactions on the back of that so and these things are dynamic and you can choose a particular week when particular product is in the firing line. As I say, the most recent spats have been on nappies; and twas ever thus. But on the general direction travel is to make sure that we are addressing the price gaps, so our customers would see as the most important to them primary processing would be a good example of that. And we know that and where we see volume increases in primary proceeding, we don’t just see it in the product themselves. We also see it in the associated items that customers use to make the particular dish that they are making. So mince and spaghetti bolognese would be an example, you sell more spaghetti, you sell more tomatoes, you sell more onion. So that's sort of learning that we get as we go through this process.

Operator

Thank you. Our last question due to time restrictions comes from the line of Nick Coulter from Citi. Please go ahead.

Nick Coulter

Just a couple of very quick follow-ups if I may. Firstly, on the discounters, are you saying we're broadly halfway through a five year industry journey to address the discounters and presumably, you will need to see more in the way of like-for-like volumes from your grocery business across that period? That's the first one, thank you.

Mike Coupe

It is nice to think we are halfway through our five-year journey. But, I suspect, twas ever thus, I've worked in this industry for 30 years, and as always rising and falling tight, but the underlying issue dynamic between the supermarkets and the discounters is playing out broadly speaking the way that we articulated in November 2015. So in 2014, we would expect the discounters to increase their market share. They have done. We would expect them to get to around 15% of the market over the next five or six years. And clearly that has a consequential impact on all of the market not just as the Big 4 Grocers.

So we are planning the business on that basis. We've said that consistently whether that's halfway down whether we are halfway down the journey or would you and will continue to be on that. I suspect, we can't be having the same conversation in five, six, seven years times. So this market is constantly evolving, constantly changing, and what we are doing is setting our business for that evolving and changing future. So there are many other dynamics that will play out over the next period of time, not least the rise of online shopping, not just in groceries but also in non-food. So, twas ever thus, to articulate is a five-year journey that we are halfway through as probably a little bit short excited in the sense. I suspect these are just part of that common structure of operating in the grocery market.

Nick Coulter

But then obviously, you're clearly expecting, in a short term sense, that there will continue to be a volume headwind. Your like-for-like volumes in grocery are weaker over a shorter period of time. Presumably to make your P&L work, that needs to tick back up again and that's something that you'll be targeting to do?

Mike Coupe

Yes, again we've articulated a headline level. We would expect overtime that the relative proportion of our business in supermarkets will fall. However, we can do lots of things to mitigate that when we've talked again extensively about what we intend to do whether it's improving the quality of the product that we sell, targeted price investments, focused on particularly the discounter facing lines. But also investigating in areas of growth like convenience like online and of course we've not talked about it much today, but and we now owned the largest non-food business in the UK. And given its relative lack of consolidation, we think there are opportunities for us to get potential growth out of that part of the industry.

So when we look at in around, we think we are pretty well set up to do with the headwinds as you describe within the grocery sector. And we think, there are opportunities for growth not just within our underlying food business but within our non-food business. And we haven’t even talked about the bank, but we also are in the bank which has got lots of upside potential as we look forward. And the process that we are going to in terms of re-platforming that, the Argos and book coming over to the bank are all part of that underlying strategy. So, we think there are opportunities in this business in the future.

Nick Coulter

Thanks. And then just one very quick follow-up on the convenience business, there's a notable delta in like-for-like performance between Q1 to Q2 versus the performance of the underlying supermarket business. What's driven that delta? Is it comp based or have you changed something in the offer? Thank you.

Mike Coupe

Well, we continue always to strive to improve all aspects of our business, if you look at something like the launch of On the Go, and our Food to Go business then, as you can imagine that would have a disproportionate impact on -- as an a disproportionate improvement in some aspects of our convenience business, tend to be products which are more convenient and therefore more important to the convenience business. If you're standing back and looking at the market conditions, you could argue relatively speaking, it's been a slightly nicer summer. It was an awkward summer in terms of some aspects of the seasonal business because it was a little bit a wetter and colder in the first part and a bit warmer and dryer in the second part, that's probably been helpful to the convenience business. And so, where there's a delta to the supermarket business is probably driven as much by the weather in August and the early part of September as anything else. But clearly some of the areas that we're been investing in product development, On the Go, ready meals, some aspects of our fresh food offer have a disproportionate benefits to our convenience business as well.

Nick Coulter

And that's helpful. Many thanks.

Mike Coupe

And I think that's it unfortunately. So, hopefully we'll get to talk to you at some point between now and our interims; and if we don't, we'll see you all at our presentation in the early part of November. Thank you very much.

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