J Sainsbury plc (SBRY) Earnings Call Transcript & Summary

Good morning, and welcome to Sainsbury's Preliminary Results 2020/'21 Analyst Q&A Call with your host, Simon Roberts. I will now hand over to Simon.

Thank you. Well, good morning, everybody, and thank you for joining us on our results call this morning. I'm joined by Kevin O'Byrne, our CFO. I hope you've had a chance to read the statement and see the presentation that we posted on our website earlier this morning. These cover what has been an exceptional year for the business and for our customers, and I'm very proud of all of my colleagues. They have done an amazing job looking after our customers, their colleagues and the communities we trade in. As we said in our statement, you can see we recognized this with a number of thank you payments through the year totaling around GBP 100 million. The third lockdown was particularly tough for everybody. And so just ahead of our financial year-end, we made our third and largest thank you payment to our frontline colleagues amounting to around GBP 50 million. Clearly, that's a number we include in our underlying costs, and so it reduced the retail profit that we reported, but we are very clear that it was the right thing to do. I set out a clear planning strategy in November to transform our business over the next 3 years. We are putting food back at the heart of Sainsbury's. And it's early days, of course, but I'm encouraged by the early progress we've made. As a business, we've moved the pace to meet the challenges of the last year and with stronger and more agile as a result. I'll now hand over to the operator to take your questions. Thank you.

[Operator Instructions] First question comes from Nick Coulter, Citi.

I have 3. I'll go one by one, if I may. Firstly, can I ask about your medium-term free cash flow guidance? That seems to be a little more assertive in terms of the GBP 500 million plus per annum. I think Kevin talked to tighter working capital in the prepared presentation, but is there anything else that's driving that change, please?

No, Nick. It's around -- it's every line, but working capital is clearly one of the things that's contributing to us. And -- but we also have highlighted this morning an unusually low free cash flow in the year we started because of the unwinded working capital from last year. And in very simple terms, what happened there is we had higher sales in quarter 4 where we got cash from customers, and we paid for those products in quarter 1 of the new financial year. So you got a swing. So this year, you'll need to really look at the 2 years which, again, you've seen in the presentation, where if you look at the average over the 2 years to '22, March '22, you see strong average free cash flow and the 3 years. And then as you've pointed to, we're very comfortable with the forecast to March '25 as we continue to focus on converting profit into strong free cash flow for shareholders.

I guess my question is, is your confidence in those outer years, is that purely working capital? Or are there other elements? Are you more comfortable about your operational plans? Because it seems like there's a small, but important inflection in terms of what you're saying on free cash flow.

It's all of the above, but working capital is contributing a little bit more.

Okay, super. Then on cost saves, which I guess are a key enabler, could you talk a little bit more about the supply chain transformation, I guess, the principles and strategy behind that and how that differs from your legacy infrastructure, please?

Yes. Thanks, Nick. So to just recap on the key points we made in November and then bring you up to speed with where we are now. So as you say, we've laid out a cost saving plan in November to reduce our cost of sales by 200 basis points over 3 years. And as you say, the supply chain and logistics transformation is a key foundation of that plan. And really, there are 3 things happening here. The first is that we are bringing together the Sainsbury's and Argos network to create an integrated transport and depot network, which means that we can operate more efficiently. And we can also, to your first question, be more efficient in the stock that we have in the system to do that. That's the first thing we do. We're well on with that. So we've announced the closure of 4 depots already. We're bringing together the way in which our integrated transport network delivers across both Argos and Sainsbury's. And that plan is in delivery and will continue this year. The second component then is, as part of what we're doing in the Argos transformation, we are moving to 30 local fulfillment centers. And that will mean that we'll be able to improve availability for customers over 3 years. That's a progressive transformation. We'll do 1/3 this year, 1/3 next year and 1/3 the year after. So the benefits flow year-by-year. And again, that underpins the key aspects of the GBP 105 million of cost saving in the Argos model that we'll deliver. And then the third element here is really about how the combination of our supply chain and logistics activities, together, power a really efficient operation end-to-end in the business and mean that we can improve availability for customers with more efficient working capital and in a way that really leverages the scale and size of the business in getting products to customers more efficiently. So it's a key element of the plan. We're well on with it, and we're confident of the commitments we've made on the cost savings it will deliver.

But how much is actually changing in the core grocery supply chain? Or is it just a case of -- what, say just the case, obviously, it's a huge effort by integrating Argos? What's actually changing in the grocery side, please?

Yes. So I think a couple of key elements there. I mean the first is that we are looking at our depot network, and we've announced the rationalization of some of our depots. In terms of our specific larger depots, in fact, in the year just finished, we've completed a reconfiguration. So in Hams Hall and Walton Point, which are 2 of our largest facilities in the U.K., we've reconfigured those, which have meant we're able to put more capacity through them more efficiently. And we're closing a couple of depots too as we enlarge the capacity in a smaller number of locations. Of course, as you would expect me to say, our #1 priority here is to make sure that we deliver on the fundamental of good availability in grocery day in, day out. And so as we affect this cost-saving program, we're too very focused on making sure availability remains strong. And you'll have seen in our customer satisfaction performance over the year, we're watching that closely, availability to improve year-on-year. So delivering the cost savings whilst making sure the operational performance is strong.

Okay. Great. Then one last one, if I may. Just on Nectar 360, I appreciate you're going to do a deep dive at some point. But if you'd be able to add a little color kind of once we wait for that detail, how many suppliers are you engaging with? What sort of growth are you seeing in that area? Is this nascent or is this more established? It would be great to get a sense of your relative positioning versus others on Nectar 360. Obviously, as you alluded to in the presentation, there's a lot of interest and a lot of noise around this area.

Yes. Thanks, Nick. So just to recap on a couple of the key headlines. I mean the first key point I would make is all about having customers within the Nectar ecosystem and the team have worked really hard over the course of the last year to accelerate the number of digital Nectar users. We've moved, as you've seen in the presentation, up to 7.4 million now. And the ambition is to get to 10 million, and we're pushing hard to do that. And the reason we're so focused on that, of course, is because it means we can engage with a broader group of customers exactly in the way that you've described, so both in thinking about how we personalize our offer towards those customers, how we work with our supply base in the broadest terms to be able to tailor and personalize the impression, the offer we put in front of those customers. And of course, as we grow online so substantially, the combination of 7.5 million plus on the way to 10 million digital users, the ability to work with our suppliers through Nectar 360. And as you've described, this is an extensive and developed platform that we've been building and continue to accelerate and in some -- I think particularly as online has grown so much, we can just reach so many more customers. So it's an area we're very focused on. We've clearly grown the number of customers substantially. And we think that being part of a coalition is a key enabler of that because there are 300 other brands that Nectar Coalition works across, so that enables us to accelerate quickly the number of customers within Nectar. And exactly to your point, we'll do a deep dive later this year. We'll show you in different categories, different products, how we're building this media platform and how I'm working with suppliers and a bigger online business, we think this has got significant potential.

Okay. We look forward to that.

Thank you.

Next question comes from the line of Sreedhar Mahamkali, UBS.

Really a couple of quick ones, perhaps they're connected. The first one is you're talking to strong underlying momentum in the release. It seems like net finance costs are coming in a bit lower than consensus expectations, well -- as well as you're talking about accelerating cost savings. So all of that, at least to us, seems to suggest an upside to where consensus is rather than the sort of GBP 620 million. So perhaps if you could help us reconcile why you're not upgrading the PBT outlook for this year, please? That's the first one. And second, perhaps is connected, as I say, phasing off the cost savings in terms of the 2 percentage points structural cost savings as well as Argos, how should we be thinking about it over the next 2, 3 years, this year included?

Sreedhar, thank you. So maybe Kevin and I will take the guidance for the year ahead between us, and then I'll come back and talk about the cost savings further. So in terms of where we are with guidance, we're comfortable with guidance. I think we would say we're 7 weeks into a new year, clearly. And there is a little bit of uncertainty more than usually in the year ahead. We don't know how COVID is going to evolve from this point. And of course, there is unpredictability in the customer and economic environment. So we're very encouraged by the momentum we're seeing in the business both in the food business and in general merchandise and Argos. But of course, that macro consumer environment is one that we're prudent about. When we look at the positives driving improvements against the base year, the Argos profitability is underpinned by the both improvements in margin we're expecting and also the cost savings in the Argos business that I'll come to in a second. As you've seen in the presentation, we're encouraged by the momentum in food. We think investment in value is growing volumes. We're encouraged by the improvement in the online economics. And we're expecting the continued momentum in food to grow. And as you've seen, we've got low interest cost, too. So there's a number of positives there. But also we've got the uncertainty of COVID costs this year. We've got obviously the bank performance in the year ahead. And we've got some differences in the variable comp as well. But maybe, Kevin, we should just share some of the perspectives in terms of the headwinds we're facing in Q2.

Yes. I mean just building on that, Sreedhar, and if you put the numbers together, you say the interest benefit, the headwind from financial services, COVID cost, et cetera, you're looking at retail profit growing a little, which I guess is behind your challenge. So all-time points, it's early. It's an uncertain year as far as sort of quantitating at this stage. But a big element which we talked to in the presentation is the variable compensation, which was unusually lower than the year to March 2020. That creates a headwind of around GBP 50 million to GBP 60 million and if we hit performance targets this year. And so if you exclude that element, UPBT, if we deliver the GBP 620 million, it actually represents underlying growth in the mid-teens versus the pre-COVID level, which is a strong performance against all of the backdrop we've talked about.

Yes. Maybe just a last point actually I would make is I think we're very much seeing the year ahead as a year of really putting the key foundations in place in the transformation of the business that we expect to see and doing that whilst we deliver a headline improvement in profitability of around 6%. So I think delivering those foundations on the momentum in the business, driving the cost-saving program that we're very committed to delivering, raising our profitability and, as Kevin has just described, there's a number of underlying aspects in the comparison that we also want to make sure we're taking into account in that.

I mean, sorry, so just adding some color, I mean, and Simon talked in his presentation about 1,900 in new products arriving. There's a cost to that, there's packaging, there's waste, et cetera, the price investment. So it really is the case of investing in the infrastructure and the foundation of the business this year and delivering profit growth reported sort of in the order of 6% versus '19, '20.

Yes. And I think just building on your second question, Sreedhar, about the cost, I think we just -- if we take just half a step back in terms of how we're seeing the landscape ahead. I think the team have done a fantastic job getting momentum moving in the food business. Now that will talk about value this morning. But the delta we're seeing in terms of customer perception on price in a few months only is encouraging. There's a long way to go. But we're seeing an improvement in our price index particularly against that of the others, which is clearly key in our strategy. And the cost-saving program at its heart is about fueling investment and the offer, creating the self-help we need to become more competitive on price. And I think in the landscape ahead, that's absolutely critical for us. And so when we look at all of the activities on cost saving, the teams across the business have worked very hard over the last 6 months to build the plans for this year. We're on with delivering them. And I think just 2 elements I would highlight: one is the key components of it; and then two, how we're organizing ourselves to make sure we stay on track. So as we set course on the year, we talked about supply chain logistics, transformation, a very significant piece of transformation across the business that we're well on with. The Argos change over 3 years and the benefits will flow pretty equally in each of the 3 years. So we will close 170 stores this year in Argos. We will open a number of store in stores and collection points. We'll open our first 7 local fulfillment centers, and we'll begin the journey of embedding that new platform for Argos. We've announced a number of changes in the center of the organization in early March as we look to become more efficient there, and we're well on with those plans. And then as you saw, we announced the closure of our counters in November. So the cost-saving program is well on. And then we've organized ourselves with a very disciplined level of governance and focus to make sure we deliver the targets that we've committed to.

And Sreedhar, something to build on that would be, if you look at Slide 54, you can see that it illustrates the savings are pretty evenly spread over the next 3 years. So it's not back-end loaded. It's kind of pretty well sort of 1/3, 1/3, 1/3.

Got it. And if I missed it, apologies. One last question. Now on the COVID costs, I know you're talking about retaining some of those costs into this year. Any sense you could share with us in terms of what level of costs we should be thinking about, please?

Yes. Thank you, Sreedhar. I think just to recap, the GBP 485 million of the COVID costs in the year just finished, as you say, it's unpredictable in terms of the exact level of costs that we would see this year. We don't know the impact of a lockdown potentially in the autumn yet, if that was to happen, but I think in the range of 10% to 15% is the way we're thinking about it of last year's COVID costs at this stage. We're continuing to make sure we prioritize safety first. Our colleagues in stores are doing a brilliant job every day at the front door making sure we continue to encourage customers wherever possible to shop alone. We're continuing to focus on delivering leading standards of social distancing in store and in our logistics operation. So that comes with costs, and that would be the view we have at this stage in terms of the amount we should plan or factor in for the first half of this year.

Next question comes from the line of Andrew Gwynn, Exane BNP.

Yes, 3 questions, if I can. I'll try and keep them quick. First, on the Aldi Price Match, obviously, an interesting chart that you put in the pack, but still a net investment. And I suppose the obvious question then is why do it? I suppose the obvious answer is counterfactual, but, yes, just a bit of help there. Online cannibalization, I think you gave some good detail at the half year results. I'm just wondering if there's been any change to that as the business has got a bit bigger. And then the last one, which is perhaps optimistic, sorry. Variable contribution margin. It's doubled. And I was traditionally taught that around about 12% is the figure we should expect for variable contribution in the store. If online has doubled, should we be thinking something in the range of maybe 6% to 8%?

Andrew, thank you. So if I'll take out the price match and online and perhaps, Kevin, online or variable contribution margins. So the answer to your question on pricer's equality, Aldi Quality Match, just to recap on the 3 core value programs that are in place now. So Price Lock, well established in the business, over 2,500 SKUs, targeting primary customers and ensuring that we've got broad value across the basket. You remember in November, we laid out a plan to win the center of the plate, and that was about establishing the fact that price perception wasn't good enough there. We lowered the price of around 400 products, and we've seen 15% volume increases as we've done that. And then to your question on things with quality Aldi Price Match, we're pleased with how this has started. We've spent time listening to thousands of customers, and as you'd expect, this platform on Sainsbury's quality Aldi Price Match is deeply rooted in hearing that customer feedback. Customers wanted 2 things. They want to see really great value, of course, on these everyday essentials, but they wanted it with Sainsbury's quality. And that's the important distinguishing feature about what we set out to do here. 80% of the volume is in fresh products, in meat and fish and poultry and dairy and produce. And we think that's really differentiated in terms of what we're doing there. And it's giving strong cut-through in terms of our secondary customers buying into it. We go live today, and I hope you had a chance to see the new app this morning, Eton Mess, definitely worth trying. But you can see that at GBP 1.10, fantastic Sainsbury's quality strawberries, price matched to Aldi. And in terms of the early results, just to the point you make, I think we were very focused as we launched this strategic value platform that we wanted to ensure the volume came through. So the chart particularly that highlights the -- both gross and net price investment and the halo benefit we're seeing, we wanted to win, and we expected to win higher volume in the basket, more items in the basket, breadth across the rest of the store. It's, of course, early days. We launched in February, but it's what we're seeing. And so when we go back to the plan we laid out, driving cost savings, creating the fuel to put into value investment, that's the way this is playing out. I would also add, of course, that our teams are working really hard with our suppliers at the moment to make sure as well as driving great volumes in the business, that we're also improving our cost of goods as well. And so the combination of operating cost savings, along with becoming more efficient in our cost of goods, is giving us the firepower in the offer to make sure that we can both improve value and drive volume. Yes. If we then talk about online, so online [ comments ] to this, to sort of give you the sense of the sort of latest picture on this. I think, obviously, we're in a few weeks now where we're starting to see the impact of the lockdown release. We're still seeing online participation in the high teens. It's come off a bit. And the majority of what we've seen come off has resulted in those customers going back into stores. So I think we're seeing the kind of novelty of returning to the physical store for a number of customers being positive, but still in the high teens, and we expect to see that to continue. You've seen in our update on online this morning, the store pick model, we've continued to drive the efficiency of it, and we think there's more headroom to go there. So we'll continue to improve item pick rates, and there's more room to travel as we recover from the impact of COVID. You've seen the drop densities that are coming through there. And the combination of maintaining a leading online position for customers whilst driving the economics, whilst ensuring that we keep hold of customers in the physical channel as that come out of online is the way we're thinking about it. One last data point, which might be helpful, we've seen 0.25 million customers sign up to Delivery Pass in the year. So those customers, by implication, are wanting to use the Sainsbury's online service over the longer term, and we think that's important in terms of maintaining online loyalty as the customer behavior picture changes. Kevin, should we pick up for contribution?

Andrew, I am unfortunately going to disappoint you and not give you the number and as I think you might have expected. But just a couple of words on the contribution. We look at all our channels down to contribution, whether it's convenience, whether it's grocery lines, et cetera, because they obviously share resources, they share assets, they share infrastructure. The way we calculate the contribution from grocery line, which has increased fourfold, is the -- we look at all direct costs, and we charge all the pickers, the vans, the drivers, the marketing, all related to that business, and it carries all its costs and has increased its profitability materially year-on-year. If we were to fairly allocate fixed cost in that business, it's still profitable. So if it was to carry, for example, 18% of all our occupancy and property costs, 18% of our fixed supply chain cost rates, depots, et cetera, it would still be a profitable business. We do -- and I think we've mentioned this before, we tend to look at the box or the network economics of a particular area. And obviously, if you allocate more fixed cost to grocery line, you give less fixed costs in the other areas of the other channels and then adjust. But we're very encouraged by when we can see sales, so for example, across the supermarket sales increased if you include grocery and online store-in-stores and retail walk-in customers up about 11% in the year, where we had grocery online and a store-in-store in supermarkets, they were up 18%. So clearly, as you've got more sales through each of the box, we get more margin in the box of a largely fixed cost base, and that's obviously beneficial from a profit point of view.

When you then overlay the kind of lost profit almost within the store, think about online is coming from a lower margin, but you're losing a higher-margin store sale, net-net, are we looking at a growth in absolute profit from growth in online?

Well net-net, clearly, your -- behind your point, it's absolutely right. It is less profitable if we do an online delivery than if someone drives to the store and just for themselves, so then we're looking at all of the levers that we need to manage in that box. So clearly, all of the grocery online levers around value utilization, pick rates, et cetera, so we manage that. And the front of store costs, so you saw, for example, SmartShop in handset stores with 30% of sales going through SmartShop, that clearly saves us a lot of labor on -- at the front of the store. So there's more to go for what we believe in improving the box economics. But we need to do that because as you've got a greater mix of online, that clearly puts some challenge with customers who were coming into the store that have gone online and, hence, the actions we're taking on the overall box economics.

The only thing and last point I would add, Andrew, is on the average basket. And I think you've seen in the presentation, we're north of GBP 100. We're holding on to high-teens percentage online. And we'd expect still to see a differentiated average basket compared to the wider industry, and that's helpful in terms of the economics. And as Kevin said, we do still see significant headroom to continue to improve the store pick model, and the team are all over that. And when you look at how pick rates are moving now, how drop density continues to improve and, as I say, how the average basket continues to sustain, in all of those, we see value to further embed.

Your next question comes from Victoria Petrova, Crédit Suisse.

I have actually short ones left. First is on discounters, in the context of current trading, obviously, if you can provide any comments. They seem to start regaining market share obviously from a low base. What is your view on that? Maybe any observations or any chance you could quantify the benefits of discounters losing market share last year. And my second question is about on-demand and immediacy players. Again, what's your view on this model? Do you see any impact on your convenience format in the recent months? Is your Deliveroo partnership with a 30-minute delivery offsetting it or sort of offering adequate competition to this habit? How -- what's your view on that? And my third question is always more or less the same. Are you planning to go into automation? Or are you still comfortable with manual pick you were focusing on through the entire last year?

Victoria, thank you. I'll take each of the questions in turn, and Kevin will comment as I'm sure there's something to add. So first of all, in terms of discounters, and I think what we would say here is, of course, there's no room for complacency, first of all. Value will be incredibly important to customers. And as we were describing just a few moments ago, we're very focused on our plan to improve value for money for customers. But we do think we're in a much stronger price position than we've been at previous key points of time. And we've seen a strong switching performance versus the discounters and particularly relative to our other large store competitors. So we're very focused on value. We're very focused on making sure we're getting capture on that value. And as customer shopping habits inevitably change over the coming weeks or months, making sure we're putting value front and center in the way in which we continue to drive our plans going forward. We do also think there is a marked change in how customers are going to continue to shop post the pandemic. We've seen 3 things really happened in that space. One, our customers valuing the safety of the large store environment. And I think even as the lockdown eases over the longer period, that will still be a feature of how customers think about what's important to them. The second thing is the wider assortment. Clearly, in a large store, upwards of 40,000 SKUs, being able to go to the store once or online once and be able to access that full range of products, kind of second point. And I think thirdly, clearly, the access to the online environment too, as we've talked about. So it's hard to be definitive about the long-term customer change and to what extent it will shift, but I think those 3 features will be very important. So we're focused on delivering against our value plans. We're focused on making sure we also bring a lot of innovation into the mix on the combination of value and innovation that we deliver a very strong offer to retain a customer, a spend of loyalty that we've seen through the pandemic. That's the first one. In terms of your question on demand, yes, absolutely, it's a very relevant and important question that we're all thinking about as we've seen this growth in on-demand substantially shift through the pandemic and over the recent period. And when we think about what we're doing today, we think we've got a unique online platform today and the combination of home delivery, Click & Collect, Chop Chop and, as you say, the partnership with Deliveroo and Uber Eats that we now have in place. And just to headline some of the key elements of what we now have. So we're delivering clearly home delivery from 250 stores today, getting to 98% of the population with an average basket of GBP 100 at one end of our platform online. And then at the other end, in terms of on demand, Chop Chop has now scaled to 17 towns and cities, 40-plus stores. And interestingly, with an average basket north of GBP 30 now, which I think just shows the shift in customer mindset to shop on demand more extensively and to shop for a wider range of products. And then clearly, Uber Eats and Deliveroo is following the same pattern in 200 locations today. So we're watching this carefully. We think it's an important feature of how we adapt and change the business to meet this immediacy mission. And I think it really links into your last point really, which is Kevin shared the economics and the way we're thinking about the in-store pick model today. And I think when we reflect on where we are with that, what we would say is that, clearly, the in-store pick model continues to really deliver performance that we expect. And there aren't, as we look at it today, any MFC or automation solutions where the economics are immediately compelling. And that's particularly because what's out there today doesn't enable you to pay per full assortments. It requires having a parallel operation in the store. And so as you'd expect, with scanning technologies around the world, we're talking to everyone in this space. We're learning and watching closely what's happening. We think, over time, the relative cost benefit of automation versus the cost of labor will be an area that we'll consider to look at. And obviously, this expectations around immediacy will become more important. So it's continuing to drive the in-store pick model. It's continued to understand and moved to immediacy, and it's continued to evaluate the options out there. But at this point in time, continuing to drive the store pick model and use the on-demand platform we have is where we are.

Victoria, only one small build on the immediacy point. It's obviously very important that we move with customers. It's very important that we trial, experiment, learn. But also just to point the scale here, just to put it in some context, if this is a sort of a GBP 50 million sort of business right now on an annual basis, that's off a base, obviously, of GBP 23 billion, so it's relatively small in the great scheme of things.

Next call comes from James Anstead, Barclays.

Simon, Kevin, I've got 2 questions, if that's okay. The first one is you're obviously trying very hard to improve your price perception. So it just seems the potential missed opportunity to introduce a new strap line with no explicit price or value element. I'm sure thousands of hours are probably spent discussing the change, so I wonder if you can talk about why that price element was dropped. And the second one is, yes, as you mentioned, SmartShop getting to 30% of sales in the stores of handsets is a pretty impressive number. Just a follow-up on that, what will that mean in terms of -- as a percentage of overall store sales? I wonder how much higher that can go. Perhaps you can give us some color about the stores with the highest participation in SmartShop.

Thanks, James. So I'll talk about what we're doing in terms of the brand and how we want to really use that as an acceleration of being food first, and we'll pick up Smartshop between Kevin and I. So I think just in terms of Help Everyone Eat Better, we think about this, to your question, James, in the broadest context of making food affordable, easy, healthier, tastier and more sustainable. So it's a combination of all of those things. And to be absolutely clear, good value, great value food is at the core of our plan to put food first and explicit in our commitment to help everyone eat better both from an affordability point of view, from a taste delivery and from how sustainable we become. So you can absolutely expect us to be extending our value credentials as we make this change. Now I would say that, as you'd expect, we are listening to thousands of customers all the time to make sure that we're really driving improvements in price perception in the way that we've laid out this morning. And hopefully, you saw TV ad this morning, the latest TV ad going out today. You can see within that both our expression of the vibrancy and taste of the food as well as I say the value of it coming through. So that's absolutely explicit in what we're going to do that's critical in our plan. In terms of -- on SmartShop, so you can see, I hope, in the presentation this morning, but we've continued to extend our performance on SmartShop. It's been, actually, from a customer perspective, as much driven by speed and convenience as it has been by safety and is the combination of smart shopping in handset stores, but also on mobile as well as extended. We've seen customers really get more comfortable with using that platform. So it's something we continue to push hard. It really works for customers. We think the extension of Nectar is really important with this. And as we think to the future, as we look to make Nectar more personal in terms of the offers that we can provide customers, so we believe the use of SmartShop will grow and become more important as a way of connecting those customers. That's the way we're thinking about it from a customer proposition. Anything else on participation, Kevin, you'd want to add?

James, I'll have to come back to you with the total sales participation. And as I said, handset store is 30%; in hybrid stores where people use new mobiles, it's more like 5%, 6%. But as far as the percent of the total sales, James, I'll come back to you with that.

Your next question comes from the line of Rob Joyce, Goldman Sachs.

So I've got 3. First one, I think it obviously makes sense to use '19, '20 as the base year. I wonder if you could help us understand that year a bit better, if you could tell us why the bonus was so unusually low in '19, '20, what happened that year. I don't remember. Too much going on out of the ordinary. Second one is just in terms of that profit bridge, as we look at it, if we were to break Argos out, am I right in sort of thinking it could be around GBP 150 million incremental EBIT at least in FY '21 given the gross margin, given the cost savings and given the considerable operating leverage and just how we think about that or how you're thinking about that, I guess, in the guidance for next year, how much of that would be given back? And then the third one, just to do a bit more on your partnership with the delivery apps. I just wanted to know, are you seeing the sales -- the immediacy sales as incremental? Do the sales through the third-party apps, are they profitable as they stand? And then, Kevin, you mentioned there's still very small scale. At this stage, is that your anticipation that this remains small scale? Or do you see early signs that this could be a meaningful part of the business?

Thanks, Rob. So Kevin, do you want to pick up on the base year and maybe the profit bridge and then we'll talk about the other ones?

Yes, Robert, in simple terms, we didn't hit the targets that the Remuneration Committee has set. That is a bit of detail in the annual report and the remuneration report, so that's probably in simple terms, we didn't hit all the targets that were set and, hence, at the level of variable pay payout was lower than we would hope to do if we hit the targets this year.

And then if we move on to the profit bridge, maybe just in terms of the -- so to your question, Robert, as you'd expect, we're not going to specifically comment on the value of that within the others, we just to kind of lay out the key components of it. And I'm looking at Page 48 in the presentation. Two key elements, so the first, as you remember, we said in November, we're going to take a more disciplined approach on promotion in the Argos business, and that will drive margin benefits, as you say. And then the second is that we are clearly well on with the Argos transformation plan. And that delivers, you'll remember, the GBP 105 million of benefits over the 3 years. That delivers broadly proportion, but over each of the 3 years. And so as we move from the stand-alone stores into the store-in-stores, as we adjust to the local fulfillment network, those benefits will flow. There's a lot of benefits from a cost perspective. Clearly, we've started the catalog. We've changed the operating model from the point of view of protecting reserve. We've taken some benefits as we've integrated the Habitat business. Obviously, the rents and rates benefits flow as we close the stand-alone stores. That's about as much as I think I can say on the bridge in the Argos model. The one other last point I would make is that we've assumed that on a broadly flat sales assumption, so the value is driven from the combination of the margin and the cost delivery. In terms of Argos...

Okay. really -- are you -- sorry, very quickly, just to clarify, we think -- does Argos in that sort of guidance for the year, is Argos EBIT in your thinking higher or lower in FY '22 versus FY '21?

Yes, so it will be lower than in FY '21. But I think when you -- as you can see in the chart, standing back from the plans we put in place, the delta in profitability from '19, '20 to this year is a significant shift in profitability. But clearly, the sales level at the top level in the year to go from the year just finished will be of a different magnitude, and that will have an impact on the profitability. And then on demand, I mean, yes, just in terms of your question, I think if I was to frame what we're doing here, we've got, as Kevin said, a GBP 50 million scale business across Chop Chop, Deliveroo and Uber Eats. Small in proportion of the overall business, but I think a very important learning for us. And remembering the fact that we've been doing Chop Chop now for just over 4 years, and the team has been working really hard to understand the incrementality and also the efficiency of that model, too. And there's no doubt that there was some incrementality in there. It's a very different customer mission to be able to access a grocery delivery within 30 minutes to -- or plans next-day delivery that you may put a slot in clearly days or longer in advance. So there is incrementality in there. We're working on understanding the scale of that. But I think we're very clear that we need to be in this mission for customers. The market is moving there. We're learning a lot as we do it. We're scaling Chop Chop and improving that model. And we're clearly getting more reach in what we're doing with Deliveroo and Uber Eats. So if we look at where this will be in 4 or 5 years' time, I think that it will be the element of how customers shop. That will move significantly, and we therefore need to be in that space.

And just -- really helpful. And are you -- are the orders through the third parties, are they profitable yet through the third-party apps?

So I think -- yes, and I think the key point here, as you've just said, Rob, is the basket level. And I think what I would say is that we're seeing basket levels ahead of what we expected. We've got around 1,000 SKUs on the platform, and the basket level has grown substantially ahead of what we expected. We'll see how that plays through in the post-COVID environment. So too early to say yet in terms of where that will land. We'll give you more color on that as the next 6 to 12 months open up.

Yes. The -- Rob, the orders make a small contribution. The question is how much is incremental. And we just -- it's early days, so we're just measuring that. And just can I just pick up James's point on this SmartShop as well before the next question? And if we look at supermarkets, it's about 17% of sales.

Thanks, Kevin.

Next question comes from the line of Xavier Le Mené, BofA Securities.

Two, if I may. The first one, we've seen some of your initiatives like removing counters following actually some of your competitors. So I just want to understand how you see sense today on how you compare or how you differentiate actually yourself with your peers. So what is your key strength today and the key opportunity for you to differentiate your offer versus your competition? That would be the first question. The second one is more about the competitive landscape. So have you seen any change in the recent weeks? And how you comment, for instance, the contact data we have seen yesterday with actually showing no inflation at all or actually some deflation. What is your view going forward about inflation/deflation?

Xavier, thank you. Okay. I'll take each of those in turn. The first one, in terms of the differentiation in the offer. So as you say, I mean we announced in November that we were closing the counters in meat, fish and poultry and deli in our stores because we've seen customer demand for our products in those parts of the store decline, not just through COVID, but over an extended period of time. And I think one of the things that we are determined to do, which is a key element of Sainsbury's being a differentiated grocery destination of the customers, is to significantly grow the level of innovation in our food offer. And you'll see us this year triple the volume of new products arriving in the business. We are well on with this work. The team are doing a fantastic job in really prioritizing innovation and working in close partnership with our suppliers to do that. So they will land, for example, over 400 new products over the coming weeks as we go into the summer, a summer where we think customers will spend a lot of time with family and friends. A summer of celebration at home. And so bringing new and innovative products at this point in time and as we look forward, we think, is really important. We'll introduce around 1,900 new products into Sainsbury's this year. And we will, what we would say, renovate, i.e., improve the specifications or packaging or an existing design of a further around 1,900. So in total, somewhere just short of 4,000 either new or improved products this year coming into the offer. So at the heart of your question, this is absolutely front and center for us in putting food first, building the muscles, again, of innovation in the business, giving customers reasons to come to Sainsbury's for those products and continuing to develop new products as customer eating and shopping habits changing. And in certain areas of customer behavior, for example, dairy alternatives and meat alternatives, vegan products, we've seen a huge growth in demand for these areas, and we're innovating at pace to make sure we can respond to that. We've also put a number of the products from the counters actually in aisle. And as we've done that, we've seen customers buy into that. So we'll continue to make sure that we convert as many of the missions that were on the counter back into the aisle. In terms of the competitive landscape, I think we've talked on to a couple of the earlier questions. Three things would be, I think, essentially, firstly, we've talked about value for money. This is a fiercely competitive industry. And I think when we think about the environment post-COVID, we are determined to make sure that we offer our customers the value for money they expect. It's never been more important. And as I've described this morning, the combination of all of the activity that we're putting in place on value funded by the self-help of our cost-saving programs is going to be critical for us. We're very focused on obviously making sure that we deliver both range and service and convenience that sets us apart. You have seen in our presentation this morning the work that the teams across all of our channels have done a brilliant job on this year to deliver on customer satisfaction with clear improvements both in the supermarket environment and in the convenience environment, areas like availability, speed of service, readiness of colleagues. As online continues to scale, we think we can do a better job there. We've held our service fairly flat over the second half of the year. We think we can improve it again to create further differential there. So I think the competitive landscape, as ever in this industry, is characterized by value for money, by service, by convenience and making sure that we create products for customers that encourages them to choose shopping in Sainsbury's. And then on the counter base, as you say, there's all sorts of anomalies really just given the year-on-year comps. It's a difficult picture to read. But we're looking at the 2-year numbers given that they give a -- I think, a clear read of the momentum in the business on a 2-year basis. And you can see both over 4 and 12 weeks, when we look at that period, the work we're doing on value and innovation and online is showing up in our relative performance on Kantar. And look, no room for complacency on this at all, but we're very focused on making sure we sustain that momentum as we look ahead.

Your next question comes from Borja Olcese, JPM.

May I ask on your views or learnings on like the tiers of [ sales ] of these guys? Do you think they can become another source of pressure for your convenience business or not at this stage?

I'm really -- would you mind just repeating the question? I'm really sorry, I think the line was just a bit crackly. I couldn't hear your question properly. Apologies.

[indiscernible] either the [indiscernible] all these new speed, convenience guys, do you think they could ultimately become another source of pressure for your convenience business? Or is it very early days?

Okay. Borja, I think -- I'm really sorry, it was quite a tough line there. I think your question was as the immediacy, on-demand picture changes, could that be a source of competition for our convenience stores? Was that the question?

[indiscernible] gorillas, all these new speed, convenience offer, and if they can become a source of pressure for your convenience business.

Yes, thank you. So I think we've got the question. Apologies, it was a little hard to hear there. So I think 2 key points I would make. I mean I think as we come out of the impact of the pandemic, it's really clear to see, isn't it, that the speed and access to convenience is never going to be more important than what we're going to see in the period ahead. Customer expectations of on-demand and being able to access grocery and other items quickly is going to be essential. And I think when we look at where our business is, we've got over 800 convenience stores today. And one of the features of our conveniences today is that the vast majority of those stores are in local communities, close to where people live. And I think as we look to expect different ways of working, hybrid ways of working, where we would expect customers to spend more time working from home, maybe 3 days at home a week, maybe a couple of days in the office. We think that the role of the convenience store, not just Sainsbury's convenience stores, but more generally across the industry, will become even more important. And so when we think about the locations of our convenience stores today, we think they're well placed. We've seen the stores that are, what we would call local grow by 13% over the course of this year. Clearly, the stores in very urban locations have had a challenged year, but those that are where customers are living are up 13%. We're going to open a further 25 to 30 stores in each of the 3 years as we look ahead. And so to your question, I think the convenience sector will see intense competition. We'll be really focused on making sure our offer, our convenience, our access really delivers what it needs to do for customers. And the one last thing I would say is that, clearly, these convenience stores in Sainsbury's, the 200 Uber Eats and Deliveroo locations and Chop Chop are being fulfilled from convenience stores.

Last question from Tom Davies, Berenberg.

Just 2 questions from me. Firstly, just on retail profitability. You've seen supplier income fall by about GBP 80 million this year. Can you like quantify how much was that from the cancellation of the Argos catalog? And I guess more importantly, do you expect that to inflect like with the Nectar 360 initiatives? And then secondly, Simon, on the Second related to the banking business, Simon, on the presentation you gave, you said you have continued your discussions with potential counterparties. I mean do you think your bargaining position now has improved given the performance of the business and also the external environment with some of your banking peers seeing a better improvement?

Tom, thank you. Well, let -- I'll take your question -- the second question first and then ask Kevin to pick up on your questions in terms of the retail profitability numbers. So I mean just in terms of confirming what we've said this morning, first and foremost, as you've seen in the presentation and in the second half numbers that the bank have delivered, that the bank team are absolutely focused on delivering the plans we laid out at the Capital Markets Day in 2019. We've got a really strong team with the bank, led by Jim. They're very focused on how we're strengthening the balance sheet, how we're simplifying the business and how we're reducing costs. And you can see in each of those elements, how that's come through because, clearly, it's been a difficult year, and you can see within that, that the team have taken a number of timely decisive actions on areas like cost, but also a good performance from our loan book and, hence, the improvement in performance in the second half. In terms of your question about more broadly what's happening here, as I said in November, we had a number of expressions of interest. And where we are today is we continue to evaluate those, but it's not something that it's -- it moves quickly. These things take time to evaluate. And if and when there's more to talk about on this, we'll clearly come back to you. But the most important point I want to be really clear on is we're very focused on delivering the plan that we laid out in September 2019. Kevin, do you want to...

On supplier income, there's a lot of moving parts. You can imagine, catalog is an element of this. And some suppliers are changing trading sort of arrangements where there's more in the base margin. But few promotions is a key driver here year-on-year, and you'll see that across the industry, but we reduced promotions in the area, you'll see that right across the industry. So that's the biggest driver.

Thanks, Kevin. Thanks, Tom.

Thank you. No further question. Back to Simon for any closing remarks.

Well, thank you. Thank you, everyone, for your time this morning and for your questions. It's been really good to connect this morning. We look forward to speaking again soon and look forward to sharing our further progress as we talk in the coming weeks. Thanks, everyone.

Thank you. That concludes your conference call for today. You may now disconnect. Thank you for joining, and please enjoy the rest of the day.