J Sainsbury plc (SBRY) Earnings Call Transcript & Summary

Good morning, and welcome to your Sainsbury's Interim Results 2021/'22 analyst Q&A call with your host, Simon Roberts. Simon, please go ahead.

Thank you. Good morning, everybody, and thank you for joining us this morning for our interim results call. I'm in sunny Glasgow this morning with Kevin, and we're really pleased that you've joined us for the call. I hope you've got a chance to see the presentation that we posted on our website earlier this morning. And 3 things to really take away from that, just to headline the call. The first would be that 1 year in from setting our food first plan, we've built strong momentum across the business. And our first half results really are a great demonstration of this with the strong operating performance, continued market share gains in grocery and robust delivery from our cost-saving program. Now there are a lot of well-publicized challenges filling out there right now across supply chains and costs that are making life more challenging. But we carried the momentum from the first half over into the start of the second half, and we're confident that we're well placed to deal with those challenges. So with that in mind as well as the fact that we still have peak trading ahead of us, a really key 6 to 7 weeks ahead, we've reiterated our outlook today and continue to expect to report underlying PBT of at least GBP 660 million for this year. So with that, let's now get into the questions. Thank you.

The first question then is from William Woods from Bernstein.

A couple of questions from me. So the first question on your retail operating profit and the Save to Invest program. I'm trying to understand the bridge from last year to this year. The first question is kind of what percentage of the COVID costs have come off versus last year? And then I suppose building on that. If you took a -- if you take the normalized view of operating profit for last year, around GBP 350 million, you strip off some of those COVID costs and add on the fuel profits and look at what savings are coming out of the Save to Invest program, it doesn't look like much of that is hitting the bottom line. Could you give some clarity on how much of that is actually hitting the bottom line.

William, thank you. Kevin, do you want to pick up on the cost?

Just on the COVID cost. We guided to COVID costs of being 10% to 15% of the GBP 485 million that we saw last year, and that guidance still stands. And it's first half loaded. So in the first half, we saw something in the region of about GBP 50 million of COVID-related costs, and that was versus GBP 291 million that we saw this time last year. So clearly, a material reduction in the COVID cost.

Understood. And I suppose if you flow that through, it looks like save to invest in terms of the bridge isn't necessarily delivering to the bottom line. Is that...

Last year, we didn't have rates, Bill, in the first half. So there's GBP 204 million that we incurred in the second half that relates to the first half. So that makes it -- it's quite confusing. I appreciate when you're doing the year-on-year.

Understood. And William, maybe just more broadly on the cost saving program. So as you remember, we laid out a plan over 3 years to deliver a 200 basis point reduction in cost. We're actually seeing the progress we expected in the first year in a number of key programs there. And 75% of the cost coming out of the business is structural costs. So the program is on track, and it's both enabling us to improve the offer, but also improve our performance as we do that, too.

Yes. And slightly, if you took 2021 and '21, '22 together, we're up actually overall on the cost. So we pulled some of the cost saving forward. I think it's the rates within this probably making the comparisons a bit confusing.

The next question then is from Fabienne Caron from Kepler Cheuvreux.

Two quick questions for me. The first one, can you share with us the level of food price inflation that you see in the U.K. market? And how [ inflation ] is behaving in this environment? And the second question would be as well on inflation, but more on the wage energy size and logistics side. Is there a way for you to give us a kind of quantification of the cost inflation you had in H1? And how much you expect in H2, please?

Okay. Let's just reflect, first of all, on the broader inflation in the market, and then maybe I'll ask Kevin just on cost inflation. So when we look at inflation across our business in the first half of the year, it was broadly flat in grocery. A bit up in grocery products, Long Life ambience. We were actually deflationary in the half on fresh. And as you'll know, core to our strategy was absolutely to become more competitive. And so as we've traveled through the last 12 months and particularly in the last 6 months, we've been working really hard to improve our value for customers. And that's one of the things that's really come through in our results as we see the momentum improving. So clearly, cost inflation pressures are building. We can all see that. And as we sit here today, we clearly expect inflation to build into the second half of the year from where it's been. Our strategy is to be really competitive on price, to continue to drive the cost saving programs that we are, to clearly work closely with our suppliers, to ensure we mitigate headwinds as far as possible. But in the end, some prices will go up whilst we retain value and the pass-through will be inevitable, and we expect that to happen over the second half of the year. I think the last thing to say on that is that across our scale and our ability to build volume in food means that we can negotiate improved terms with our suppliers, too, and that's obviously key to offsetting some of this pressure. Kevin, do you want to add?

Just on some of the cost inflation, and I mean things like energy, we're protected because we hedge in advance, and our hedge actually rolls into the next financial year as well. So we're well protected on energy. And freight as well, about over by 90% of our freight is on fixed terms that we had negotiated pre the current spikes. So we're protected again at the moment on freight costs. And in salary costs, it's largely the logistics. And there's 2 things happening there. There's some one-off payments sort of for Christmas sort of retention payments. And then there is some base salary negotiations that are going on. But overall, as the majority of our employees sort of across the retail business, for example, we set the wage rates back in sort of first quarter and quarter last year and those rates we haven't have changed.

Okay. Can you just come back on the behavior of IV? Is IV passing some price inflation in commodities, for example, like meat, fish and poultry?

Yes. I mean I think as you'll have seen, there is some upward movement of prices in some areas. Milk's been an example of that in recent weeks, where you've seen the industry begin to move prices up. And I think coming back to the outlook, we clearly should expect food inflation to increase over the second half. And as a result of that, some prices will go up. I would expect the industry to behave rationally in this regard. There's higher input prices. There's higher operating costs that will inevitably lead to some price increases. As I say, we're going into that environment. with a much stronger relative price position than we've been in before. And you can see when you look at the presentation, particularly in the areas of comparison against Tesco and Aldi, for example, how much more competitive we are year-on-year, Aldi, for example, around 400 basis points improvement. So clear inflation pressures they will feed through holding on to our value position strategically, absolutely key for us.

The next question then is from Rob Joyce from Goldman Sachs.

Got sort of 3. So firstly, just on the guidance, I wonder if you can help us understand the decision to sort of keep the guidance where it was as far as I can see your sort of interest costs have fallen by around GBP 20 million since you last guided us on that for the full year. It looks like you pulled forward cost savings of maybe GBP 50 million to GBP 100 million on that. And I think Argos, et cetera, it sounds like you think it's in a structurally more profitable position. So I was just wondering why there wasn't the opportunity here to maybe increase that guidance would be the first question. Second one, just on food inflation, I wonder if you could give us an idea of where your basket inflation is currently running at. That would be very helpful. And then the third one, just in terms of exit rate, the Argos 2Q, I think, 2-year deceleration has got a bit of attention there. Just wondering if you could help us understand what the exit rates are looking like in Argos into the third quarter, maybe on a 2-year basis.

Well, thank you. Let's take each of those in terms of sterling guidance. So as you said, first thing I just want to be abstract we started the call that we've reiterated our guidance of at least [ 660 ]. And as you've seen in our results, we've had a strong first half of the year. I'm really encouraged with the momentum in the business. We've got good momentum against our strategy, and we're taking that momentum into the beginning of the second half. So I think that's important to say. That being said, of course, there's 6 to 7 weeks to Christmas. I think it's about 50 days to Christmas, and there are some uncertainties. And so you'd understand that we're applying some caution given the timing of where we are, given some of the uncertainties that are out there. And that's the reason why when we look at where we are, good momentum, some uncertainty, time to take a cautious view of that period of time until we get to sort of Christmas, and I reiterate again at least 660. On your second question on food inflation. Just come back to a couple of points we were just covering. So I think, as I say, in the first half, we were broadly flat, a bit up on long-life grocery and a bit deflationary in fresh. As we've said, we expect that environment to change as we look ahead. But in terms of where we are now, we're going to absolutely hold on to our competitive position in those product areas that are most important to customers. We're working very hard on the cost saving program to make sure that we can absorb some of the pressure. And inevitably, there will be some pass on as prices in some areas increase. And then specifically on your third question on Argos. So just standing back from the Argos business. We guided to flat sales in Argos from '19, '20. As you've seen, we had a strong first quarter, a softer second quarter. I think when we look at the second quarter particularly, 2 or 3 elements in that, that would be important to highlight. The first was clearly, we've had a non-comparative position in August, given the fact the number of stores that were closed a year before. Secondly, it was a softer summer. So just all of the seasonal products in the Argos business didn't benefit from the very warm weather that we've had before. And thirdly, there are some supply challenges coming through. They're well trailed. Consumer electronics would be a good example, where there is less availability than would be optimum and those are starting to play through. I come back to the key strategic choice in Argos, which is we've laid a plan to significantly improve the profitability through transforming the cost base and taking a less promotional stance. And so when we look at the period ahead, clearly, we were encouraged we've got that plan in place because that is supporting profit delivery in Argos. And therefore, whatever the challenges are from a supply chain point of view, we believe we can deliver strong profit performance underpinned by cost transformation and as I say, an improved margin position. Hope that helps, Rob.

Just one quick one. The cost savings pull forward in the program, is that -- where is that mainly falling? Is that in the first half or the second half?

It's spread across the year, sort of pretty evenly across the year. And bear in mind, Rob, we have higher sales. And so hence, we need extra cost savings to offset some of the additional costs of driving through the higher sales.

Then the next question is from Andrew Gwynn from Exane BNP Paribas.

Just come back to the property transaction. I think, Kevin, you talked about that during your part of the kind of preamble. Just wondering if you can say a bit more, I guess it fits into a broader use of cash question, sort of how you're making these sorts of decisions as the business decays. So that's kind of the first question. Sort of 2 questions. So firstly, just to explain the transaction a bit more and then slot into a broader use of question -- broad use of cash, sorry. And then the final question, just on availability in grocery, clearly, some challenges kicking around you kind of alluded on that, but just to kind of flag presumably, we're not expecting a significant impact in the second half.

Shall I just to -- yes, we have a structure, Rob, which has 26 stores in it. It was set up in 2000. We've got about a 50% interest in it. And we put these 26 stores in and we lease them back. And the leases come to an end in 2023. But under the structure, we have the option to either we can sign up new 20-year leases in the structure, we can exit stores or we can buy them. And we've taken a decision in the half, as you saw, to exercise the option to buy 13 of those stores. And that gives us great flexibility because we can either retain the stores as freeholds or we can lease them back on terms that we like. And clearly, it has an impact on net debt, as we've talked about, because as you effectively take short leases and move them to longer leases, you increase your lease debt, as you'll know. But overall, there's another decisions we made in the second half on a further 10 stores. But really, what we're doing here is taking control of the stores, and then we'll keep the ones we want to keep either on freehold terms or on lease terms that suit us. But overall, very positive because we will get cash from the structure, we'll get control over key stores that we want to have in the estate and we'll get leases that we want. Is that -- does that help?

Yes, I think so. I mean, I can work through the numbers a bit later. But I just think to kind of broader use of cash question. Obviously, you've decided to repay the convertible run reissue and so forth. So just a broader question.

Yes. Well, I mean, our position, high hope on cash flow is clear. It's been a big focus for us, as you know, and in a very disciplined way, turning profit to free cash flow. We've taken some real structural decisions on our pension scheme. We've reduced our debt and reduced our interest. The bank is self sufficient from a capital point of view. So we've pulled a lot of levers to make sure that the cash flow flows through, the profit flows through to free cash flow. And then we -- to date, our view has been we want to pay a dividend and have it well covered, and we want to reduce net debt. And why do we want to do that, improve the financial flexibility of the group. And of course, should increase the equity value for shareholders as well. And in the last 3 years, we're very pleased that we've -- sorry, 3 years to March this year, we'll deliver on average about GBP 500 million a year. So that commitment, that focus continues. And I think our track record on this is hopefully clear we've raised the target a couple of times. And clearly, we will be ahead of target now because of the convertible and we will achieve the target without the convertible that will pull the target forward and obviously, the legal cases that we've negotiated. So we're in a good position. Once we get to the point where we've achieved our leverage targets, the net debt-to-EBITDA sort of less than 3x, et cetera, and then we'll come back and talk about what's next from a capital allocation point of view. But look, we're very clear. Free cash flow is for shareholders. We remain very focused on it, and we'll continue to be very disciplined in that.

Thanks, Kevin. To your second question, Andrew, just in terms of the value in grocery. I think we've all seen, it's been a challenging few months. It's been tricky on a combination of supply, clearly labor, HGV drivers the challenges upwards in the supply chain, too. So I think when we look ahead over the second half, 2 or 3 things just to highlight that we've done. I mean the first thing is that I think that we've seen some stabilization and availability. The team has been working flat out to make sure that we really deliver the best availability for customers we can -- it's an absolute primary focus for us because, in the end, supply security is key in delivering customers certainty of what they can buy. And I think we've improved our position over recent weeks. As is shown actually in the presentation, you can see our customer satisfaction over the first part of Q3 as really ticks up again. It's tough at the end of the summer, particularly in areas like milk and bread some of the grocery lines, but we've seen that improve. Now I wouldn't describe it as all solved, but I describe it as improving, and we're confident we're doing everything we can there in that regard. So when we look over the second half of the year, I think clearly, our scale, all of the relationships with suppliers that we're working really close with. We're doing a lot of work on recruitment to make sure we can move product through the supply chain. Interestingly, in the last few weeks, we've actually began to pick up product from suppliers to make sure we can guarantee availability back in the business. And that's been one of the enabling factors to improve in the situation. So it's clearly really challenging out there. But I think we're going into what we expect to be a really big Christmas. I think for all the obvious reasons, we're expecting to customers to really want to celebrate this year given the events of last year. And so a bigger Christmas, a bigger demand curve, more at home grocery consumption, a lot of work going in to get the supply we need that we work on the road we need and the resilience we need to deliver the availability that customers expect. I hope that gives some color on what's going on behind the scenes.

The next question then is from Andrew Porteous from HSBC.

Just a couple from me. First, on the inflation side of things. I appreciate you're expecting to see inflation starts to come through. Just wondering on what sort of quantum you're seeing in the supply chain? I mean is it -- I mean, clearly, pressures have increased, but is it at a point yet where you're sort of worried about the impact, not an impact on volumes as you start to pass that on to consumers. And then a second one, really. Could you just talk to where Argos is trading into peak. I appreciate there are some supply chain issues there. You referenced sort of consumer electronics. Where is your availability versus sort of broader industry on some of the key categories?

Yes. Thank you. So just on your first point on inflation. And so I think as we look ahead, clearly, we can't predict the scale at which inflation is going to pass through, but the pressures are clearly building from the supply base in a number of areas. And we -- as I say, we would expect the market to pass that on. And what, as I said previously, we're going to clearly be very focused on our own price competitiveness within that I think in terms of what we're doing, clearly, we're putting more volume through the business. More volumes mean that in the conversations we're having with suppliers, that's helpful. But of course, the pressures are clearly there. And so inevitably, that will flow through. At this point in time, we're seeing some of our competitors begin to move on price. We're clearly moving where we need to, whilst retaining that competitive position. In terms of Argos going into the very important peak 6, 7 weeks of the year. I think as I say, there are some challenges in the supply chain, specifically for what I would give you is that we normally, in our general merchandise business, run a toy promotion, a pretty significant toy promotion at this time of year. We put that back a couple of weeks because the product wasn't in the U.K. We were pleased when it landed at the weekend. It's on its way for our stores now it will happen next week. So I think consumer electronics would be an area whether it's just a global shortage of products. In some other areas, we are moving the phasing of key activity to reflect when stock will land. And in that regard, I wrote to a significant portion of our customers last week just to help them plan so that they know when the key events and activities are happening because they're not necessarily happening in the same sequences as they would have expected from previous years. So I think all of that's in place in terms of getting stock through. We've launched our Christmas ranges across GM. We go live tomorrow with our Argos marketing for Christmas. There's a lot of activity going in to make sure we can give customers what they want, recognizing that 80% of customers also are now shopping digitally in Argos. So as stock arrives, we can be pretty agile in terms of making sure we serve that to customers in the moment as it were. And I think when we look at the trading picture, there are clearly some uncertainties in the GM and see supply chain. And so that's the reason why when I stand back and look at the Argos performance, when we look at the second half of the year, the cost transformation programs, the work we've done on margin. And I think importantly, it will be a less promotional environment. I don't see it there's less -- there's likely to be less activity around Black Friday. We expect to sell more products at full price rather than a discount. And so in the round, that's the reason why -- one of the reasons why we're confident on the underlying improvement in the Argos profitability whilst there will be some challenges driven by supply chain in the top line.

The next question then is from Clive Black from Shore Capital.

A question really around costs and stock and lost sales in a moment. Just in terms of some help around the magnitude of things. Year-on-year, I guess, particularly within Argos or in nonfood in general, what sort of costs are you facing into that would have been unplanned this time last year, if you get my drift? And then secondly, do you have a feel for the store of magnitude of lost sales as a result of supply disruptions? And linked to that, should we be concerned about H2 working capital is a load of Christmas gear going to turn off in February, for example, that you'll have to hold or do what will with. Because I guess what you're saying is without these challenges, Simon, you probably would be announcing an upgrade to guidance today. Is that right?

Thanks, Dave. So let me take your last question first, and then we'll go through each of the specifics you've raised. So just coming back on our guidance for the year. As we've said, at least 660 on the basis of all the momentum that we see in the business in the first half and we can see clearly going into the second half. I would just -- just I reiterate the strength of the momentum in the food business. I'm really encouraged by the fact that our improved value position means that we're growing share on a 1- and 2-year basis. We think it's really important, and that's been underpinned by the strength of the cost-saving program. So as you'll understand, I'm sure we're 6 to 7 weeks from Christmas. There's a lot to play out in that period of time. But with that momentum and with all that's in front of us, time for a bit of caution at this point in time as we get through the side of Christmas, but we're pleased with the momentum and at least 660. So just in terms of your last question. In terms of the specific element that maybe just in terms of some of the costs, Kevin, and the...

Probably, Clive, the 2 areas that I'd point to that we wouldn't have expected them to be quite worth is freight and logistics. As I say, 90% of the freight is hedged. So we do have that 10%, which we will largely pass on to consumers. And then in logistics, we have the one-off elements around retention and some of the negotiations that are going on right now, which we'll see coming through in the second half. But I guess that's well publicized. And your working capital point, there could be a little bit at the year-end. You're right because we're seeing normal freight would be 24 days from Asia. It can be up to 40 days. So there will be some potential there. But in the grand scheme of things, it won't be -- we'll still deliver our free cash flow commitments this year.

Yes. And then just in terms of impact of sales on stock and I guess, leads to the working capital. And I think in the main, as Kevin said, delays in shipping are around 2 weeks. And so clearly, we bring all of our Christmas stock in for around this time of year. So 2- to 3-week delays are the main order of the day, which means that rather than launching, for example, all of our Christmas products on the weekend just gone, proportion will arrive the weekend after next. So still in plenty of time for Christmas. In terms of the impact on losses. And what I would say is in the categories where there was more pressure on the supply chains in GM, they are the categories, clearly, which are inherently lower margin. So consumer electronics, I talked about toys. So Again, I wouldn't want to underplay the significance of the challenges in supply in some areas. But when we look broadly at the P&L and general merchandise, what we see is that cost is really delivering, and we're on track as to where we expected to be on the Argos plan. As I say, I think Black Friday will be a smaller event, for all the obvious reasons. There will be a lot of promotion in the market and in the areas which are higher margin for us, clearly, those products are less of an issue. So in the round, that's one of the reasons why we can be confident in the second half profit outlook for Argos, albeit with some impact on the top line for the reasons that we're describing.

And then just finally, could you just give us a few words on the fuel market and what that's doing for J Sainsbury P&L?

Yes. Thanks, Clive. So I think -- I mean, a couple of things to say here. I mean, clearly, putting the events of a couple of 3 weekends to 1 site, 2 things I would say to you. First of all, we've grown share in fuel, and we're pleased with that. And I think there's a correlation between our improved performance in grocery, more customers visiting our supermarkets and our improved share in fuel. So we're encouraged by that. Clearly, we continue with our strategy of pricing locally and competitively, and that's working well for us. We've got a strong network of PFS, petrol-filling stations in good locations, which are working for customers and working for us. And look, of course, you'd expect our colleagues have done a incredible job in the fuel business over recent weeks. It was a really challenging number of days, as we'll all remember. And so we've learned a lot to that period. I think we delivered well for customers. We're encouraged with the financial performance. And as I say, the combination of being better value in grocery and gaining share in fuel is one of the things that we're encouraged by.

The next question then is from Sreedhar Mahamkali from UBS.

A couple of quick ones. Just to follow up on some of the discussion on Argos. The first one is, I guess, a concern for investors is that Argos slowed down a little earlier than expected and sort of trying to extrapolate that into next year is clearly a bit of a concern. Maybe from that point of view, if you can talk a little bit about how you're strengthening the underlying Argos customer proposition, looking beyond the short-term supply chain or tough comp issues. Is there anything that you're seeing there in terms of customer proposition. Any data points that you can share in terms of what's happening with the Argos customers and the feedback you're getting and what you're doing there? That will be helpful. And secondly, specifically on the supply chain issues. We've been talking about are they getting better or worse over the past few weeks? If you can just give us an idea, the delays that you talked about, Simon, 2 weeks, is it getting better? Do you have any visibility on that? And the last one is instant grocery sort of rapid worry delivery. I know you're active in the sort of 6-minute grocery area. You've got partnership with Deliveroo and new buddies and you've got your own Chop Chop. How are you thinking about the 10-minute grocery delivery opportunity? Is that something that you could see yourself participating in Chop Chop or any other partnerships?

Okay. Thank you. Well, let's take each of those in terms. Let's start with your questions on Argos. So I think, look, a couple of important things here. I think clearly, when we look at the second half, I hope we've given some good context in terms of the broad supply chain challenges. So underneath that, what are we doing to strengthen the Argos proposition? Well, you remember when we launched our strategy, 3 really key elements of that in terms of Argos. The first was that we are now halfway through rewiring the Argos fulfillment network with the launch of around 30 local fulfillment centers. The advantage of this as we roll this out will be to improve availability for customers. So in a business that is now 80% digital, our ability to serve up availability to customers and enable them to access products at speed is clearly going to be a key source of advantage. And so we've opened the first 2 local fulfillment centers in Leeds and Bristol. We're really pleased with how that's going. And clearly, that program will roll out in terms of improving both stock availability and also financially reducing working capital. Secondly, in terms of the proposition, we put Nectar into Argos around a year ago now, and we're really encouraged with a number of Argos customers that are now accessing Nectar. That gives us a way of personalizing the content where we talk to those customers. Thirdly, as part of the Argos platform, clearly, you've seen the relaunch of Habitat as customers actually increasingly post pandemic and post lockdown are looking to refresh their homes. We're really excited about the potential for Habitat at this point in time. And actually, back to the point about the margin-accretive categories in the general merchandise model, the strength of home and furniture for us is one of the things we really want to push on. And we think it comes at a time when there's a high level of customer interest and appetite for those products. And as we've rolled Habitat out, we've been really encouraged with the response we've had from customers. And then underlying all of that, of course, it's about making sure that we're competitive where we need to be in Argos. But also, as I said earlier, recognizing the fact we're not going to over promote in Argos. So we're making some very conscious choices about improving availability as we roll out the LFC network. As I say, both digitally and in product terms improving the offer, but also being selective as we look ahead about the extent to which we promote. So that's where we are on Argos. I would just furnish the point by saying when we look at the second quarter, there are some important points in the comparative that I think explain some of the performance. And just to reiterate a couple of those. As I said, the first is in the lockdown, clearly, last year, we were pretty much on our own. And so as everyone else is open, that's clearly now changed the comparative position. Secondly, of course, we've seen a much softer summer, and that had an impact in the Argos business. And thirdly, just to say that there was clearly some supply chain impact starting to come through, which we would expect to continue as we look ahead. So that's where we are on Argos and through there. And if we just then extend and look more broadly in terms of availability overall, I think, as I said, in grocery situation stabilizing, still plenty of challenges. But I think the size and scale of what we're doing gives us confidence as we go into a big Christmas and we can deliver customers what they want. And if they can't get the exact product, then something very close to it. And then I think just thinking about inflation more broadly, I think was your other question?

Rapid delivery.

Yes. So just on inflation before I finish that rapid delivery. As I said a number of times, we are expecting to pass on as the pressure builds whilst keeping really competitive. And then on your point on grocery online, clearly, the momentum has been really strong. We've tried twice the level we were pre pandemic. You can see our presence now in on-demand. So in Chop Chop, we're now seeing a significant scale there in just under 50 stores, and through Lidl and Uber Eats just under 400 stores. And a lot of that volume coming from outside of London. And look, we're listening and learning here all the time. So as you'd expect, we're looking very closely at how customers are shopping. We're learning a lot about what they're putting in the basket we're actually pretty encouraged by the basket levels here, up over GBP 30 in Chop Chop and towards GBP 25 in Uber Eats and delivery. And as you'd expect me to say, online fulfillment, productivity of online responding to how customers are changing the way they shop is a very key focus for us.

Sreedhar, I might just add a point there. We probably, at this stage, see that, that sort of 15-minute type delivery as being something we'd work with partners. We have Chop Chop, but that wouldn't be -- we wouldn't see that expanding enormously. And our business focused on the sort of same day, next day part the markers.

Just on that supply chain point, I think some of what I was trying to get to is you talked about 2, 3-week delays in shipments coming through. Is that a pattern that's getting progressively better or you still see that sort of delay persisting into next year is sort of what I'm trying to understand.

Yes. No. Okay. Thanks, Sreedhar. So let me just try and clarify on that. So I think, look, inevitably, the global supply chain situation, we don't think it's going to rectify itself in a short period of time. These issues are with us for a while. So I think what we're doing is we've learned a lot through the pandemic in terms of adapting how we work, planning early, booking capacity early, as Kevin said. And we're doing that in the context of an environment that we think will continue to be challenging for a while yet.

The next question then is from James Grzinic from Jefferies.

I had 2, really. The first one, I presume all of the host over on freight and energy over next year and...

James, the line is quite difficult to hear you. I don't know if you -- can you get near the phone?

Can you hear me better now?

A little bit. That's better.

All right. Okay. Yes. My first question was around the impact of the hedges on freight and energy rolling over, I presume next year. Can you give us a feel for the magnitude of the incrementing cost you'll get as that happens? And the second one, I understand your point on ultra convenience. Is that independent on how big that market turns out to be. Would you always do a via third-party logistics providers or if it turns out to be a big market, would you look to internalize all of that?

James, I won't be able to give you detailed numbers on freight or energy. Our energy hedge runs well into next year. So we've got quite a bit of protection there. As it rolls off, clearly, we are rolling programs, and it will depend on where the market is at the time. Likewise, with freight, all I could give you some direction and clearly, we're in negotiations ongoing on freight. We would be able to do sort of long-term contracts with people at rates that are reasonably materially lower than the spot rates that you're seeing in the market right now, but they will be more than -- we contracted the last time because of the changes in the world. And I think the comfort I would take there is, I think, relatively, we will get good freight prices relative to the market. And we will -- I think the market will have to pass those freight costs on. So it's not something we're clearly fighting to keep them as low as possible because that's good for customers, but we'd expect that to pass through.

Thanks, Kevin. And then just on the second question on kind of immediately ultra-convenience, as you say. I mean, I think a couple of points just to reiterate here. I mean the first, I would just I would just talk about the proportion of our online business in grocery today. So when we look at where we are in total volumes, we're doing somewhere around 640,000 or a bit more home delivery, 75,000 around a week on Click & Collect and around 70,000 on immediate. Just in terms of proportion terms of the total volumes we're putting through. It's clearly growing at a rapid rate, but at the overall level, we're confident the platform we have in place enables us to learn fast, the scale in locations where customers are looking to access this service, but also to clearly look at how this is going to play out over the longer term. And as Kevin said just now, the key focus here really is what time frame customers really do value and what size of basket and range they want to access. So it's an important and fast-growing part of it, but it's a very small element of the total online at this point in time. If you sort of think about what's the size of our immediacy sales today, it will be equivalent to 1.5 or 2, 2 of our supermarkets in total for the year, and we run 620 supermarkets. So it's growing, but we need to keep into context its relative size. And as I say, understanding how customers want to shop this and how our Chop Chop platform particularly kind of respond is very front of mind. The other thing I would just say is we've just recently relaunched again our same-day service. It's one of the things we have to stop in the pandemic for obvious reasons, but we're back out with that now in more stores. And again, customers are responding to that well. I hope that gives some more color to the question.

Can I follow up on that, Simon. Can you hear me?

Sure.

Yes. I just -- I take the point that it's very, very small now. I guess more broadly, the debate is does the offering shape the scale of demand. And if it does, and it becomes a much bigger part of the market, would you be looking to internalize that rather than have third-party logistics providers?

Yes. I mean look, I'm trying to give as much context as I can in the context of -- I mean, you can see our strategy, which is we invested ahead of the curve digitally, and we have a strong online food business. We're growing market share faster than others. You've seen how we've adapted through the pandemic as we've scaled online capacity to more than double our volume. And I think we've learned a lot as a business about, one, the speed and place we can move at. And two, how customers are shopping online. And not to repeat the point, but I think it's really important we focus on home delivery and Click & Collect because that's where the vast majority of the volume will continue to be. And let's remember, customers value, freshness, speed, quality and value. And that's the key focus of our work in those areas. We'll keep listening and learning and watching. And I would just stress the point again, we're very present and active in immediately to Chop Chop and deliver and we'll continue to learn and develop our thinking as that grows.

[Operator Instructions] The next question is from Victoria Petrova from Credit Suisse.

I have 2 small outstanding ones. First, still on food price inflation. Just to be clear, do you think you have already seen a peak? And are you more focused on some spot contracts or forward-looking contracts, for example, for proteins where we are seeing such a strong price inflation. And my second question is on real estate. Obviously, with reshaping of the industry, which you just talked about a lot, you probably have some excess real estate. Do you -- how do you think about it? Obviously, during your Capital Markets Day a couple of years ago, you talked about subleases and various complementary opportunities for your stores. Do you have anything to add to that, maybe provide some color or maybe there are any sort of financial engineering changes in approach?

Victoria, thank you. So I'll talk on food price first. I heard the second point really clearly in terms of you particularly referencing proteins there. So let's just talk about it, and then Kevin may be on the property question. So I think let's just take a step back here on food inflation. I mean, I think we can all see the pressures that are there on the combination of supply chain, input pricing on commodities, costs in the supply chain of production and labor supply chain challenges that are there in terms of moving products. So they're clear, and we can all see them. I think in terms of where we are, as you'd expect, we're working really closely with our suppliers. There are going to be some inevitable price increases flowing through. We are entering into that context in a very different value position to we were before. And so it's a combination of these 2 things, which is improve value for customers. So on day in, day out products, we can deliver what customers expect of us. And then clearly, in areas where there is significant headwinds building on commodity prices, raw material costs, cost of production, that will lead to, I think, the industry rationally moving prices up. And in the second half, I think we all expect that to happen. We will do that as the market moves and as I say, with a strong value position to start with. On the specific on proteins, as you say, there are some value chains where the pressures are more significant. I just contrast that in our own business with the strength of the change we've made in meat, fish and poultry. So one of the key elements of our strategy was to really win secondary customers back, who weren't shopping the center of the plate for it with us. And you'll see in our presentation, Victoria, particularly in meat, fish and poultry, how much the volumes have moved forward as we've improved prices. And of course, if I'm a meat, fish and poultry producer, one of the things I'm looking for is volume. And so as we improve volume, and you can see on 27 of our presentation, that,our volumes have grown 10% against the market, 7, and that provides some mitigation to the inflation pressures that are there. So I hope that gives them some background on that question. Kevin, do you want to pick up on property?

Yes. Victoria, it's been an area of focus for us for some time as part of our cash agenda. So firstly, I'd say we've sold off over the last number of years assets we didn't want, sites we didn't trade from where we were sort of a landlord for someone else. And we've sold off our land bank where we built up land, as everyone else had in previous times for future development, which we concluded we didn't want to use for stores. So we've been doing that. If you look back, you'll see coming in every year for the last number of years as we've done that. That's largely complete. The second thing you'll see us being is closing underperforming stores, and you'll see that even in this half, if you look at the detail in the accounts. You can see the number of supermarkets and convenience stores that we've closed, and we'll continue to do that. And then the other thing I'd point to is the mixed-use developments, which we have talked about before, and we're probably overdue. We must give you an update at the year-end. But we've got one site in development, we've got a number of sites in planning, and we continue to push that through so that we create strong cash flow from particularly assets we have inside in the London area, which are very valuable for -- to put homes on them, and then we get a new store at the same time, and we generate cash flow from that. So that continues to be a focus from our property team.

We have no further questions at this point. I'll pass it back now to Simon for closing remarks.

Well, thank you again, everyone, for joining us this morning. Just to close by saying, of course, really key period as we head into Christmas. We're in good shape. Some challenges out there, but I think some good momentum in the business. And as we look out over the second half, we're very confident in the plans and the actions we're taking. You can see the strategy starting to deliver. We're in 1 year of 3. So there's a lot in front of us to do, but I feel we've got all the right focus in place to really drive it forward. And as you know, we're very focused on delivering for customers, and we're very focused on delivering free cash flow to shareholders. There's some good momentum, and we're very focused on the second half. So at least 660, and look forward to talking to you soon, and thank you again for your time. Thanks for this morning.

This presentation has now ended.