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Sainsbury's analysis and valuation - Essay Example

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J. Sainsbury is a listed company in London Stock Exchange, which owns Sainsbury’s supermarket that operates its activities in the UK and in North Ireland. It was established in 1869 in London and was famous particularly for its bakeries in 1970s. The main activities they are in involved in are: 1- Sainsbury’s supermarket which is one of the third biggest retailers in the supermarket industry, that has a chain of 547 supermarkets…
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Sainsburys analysis and valuation
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Download file to see previous pages It generated ?131 million PBT in 2010. 4- Sainsbury’s banking which is the result of a joint venture with Lloyds bank. It created such services as insurances, credit cards and loans and generated ?7 million PBT in 2010(j.Sainsbury our business 2011). According to J.Sainsbury RAQs (2011), there are different competitors of Sainsbury for each of its areas. For example, for supermarket, which is the biggest activity in the company, competitors are Tesco, Marks & Spencer and Morrison. However, the competitors for banking service are the traditional high street banks, Tesco and M&S financial services, Egg, MNA, Capital one, Direct Line and Cahoot. This paper will analyze the Sainsbury Company through a look into its macroeconomic environment, industry, five forces model, business model, and financial conditions. Business investors may use the recommendation made in this paper to see whether to buy, sell or hold Sainsbury’s share. Macroeconomic Environment: Interest Rate and Inflation Rate UK interest rate in March’ 2011 had been registered at 0.5% which is a record low (BBC, 2011). In February 2011, inflation rate of UK rose to 4.4% (BBC, 2011). Interest rate has a major impact on time value of money. Changes in the rate of inflation generally result in alterations in the interest rate. These two factors are the key factors employed in the decision making for investment since they have a direct impact upon the ‘investment yield’. In case of UK, the record low interest rate will support the investment on shares. Rising interest rates retard the growth of inflation. Lower rate of interest increases the borrowing from businesses, which can have an impact on Sainsbury’s. This can make investment in durable consumer goods products such as automobiles, capital equipments and buildings appealing. The lower rate of interest can also affect the value of currency by making the currency weak. This can in turn enhance the market value of Sainsbury’s for the foreign purchasers. This will also help to increase the profitability of the company (Economy Watch, 2009). Rise in inflation rate coincides with the increase in cost of fuel, food and clothing items. Rise in inflation generally takes place due to increase in wholesale price index, which can have an effect on retail spending of a consumer and can weaken the consumer demand. Inflation rise also increases prices of products and VAT (value added tax) on a product that generally affects the sales volume. Factors like high level of inflation, subdued growth of wage and indecisive economic viewpoint generally reflect in terms of consumer spending. Therefore, the inflationary scenario in the UK can have a big impact of the sales and profitability of Sainsbury (RTE News, 2001). 1-PEST analysis: Political According to Lawrence (2010a), the government intends to limit the role of the Food Standards Agency (FSA) and remove the ‘traffic light’ food labeling system, which has long been opposed by leading supermarkets like Tesco. As a result, the food industry will face little to no regulation for self and voluntary regulation (Lawrence 2010b). Leading supermarkets will have a ‘strong presence’ as far as accompanying the government on the forming of new ...Download file to see next pages Read More
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