(Bloomberg) -- J Sainsbury Plc warned of a return to higher inflation in UK supermarkets after the Labour government hiked payroll taxes in last week’s budget.
Britain’s second-largest grocer said it faces a £140 million ($181 million) bill from an increase in national insurance contributions, the main revenue-driver in Chancellor of the Exchequer Rachel Reeves’s more than £40 billion of tax increases.
Simon Roberts, Sainsbury’s chief executive officer, said retailers faced a “barrage of costs,” with business rates — a property tax — and the minimum wage also set to rise next year.
“There just isn’t capacity to absorb all of this,” he said during a call with journalists after the company reported first-half results.
His comments follow a similar warning from Marks & Spencer Group Plc on Wednesday.
Reeves increased the rate of employers’ NI contributions and significantly lowered the threshold at which the payroll tax starts to be paid — a measure that will affect employers of part-time staff.
The chancellor’s budget was deemed to be inflationary by the UK’s Office for Budget Responsibility, yet Bank of England officials — who decide Thursday whether to cut interest rates — have to consider a range of factors, including Donald Trump’s plan to increase tariffs and slash taxes in the US.
Roberts, meanwhile, said Labour’s tax increases will hurt not only retailers but also suppliers and all businesses in the sector.
“I don’t think you can shy away from the fact that because of the changes on everyone’s cost base, it’s going to feed through into higher inflation,” he said, signaling some of the costs may be translated into increased prices. He added that Sainsbury will try to mitigate the impact on customers.
Roberts did not say whether Sainsbury would reduce its headcount or use more automated check-outs but said there would be “some difficult decisions to take” as a result of higher costs.
Share price
Sainsbury shares fell as much as 3% on Wednesday morning after its underlying retail operating profit before tax came in at £356 million for the half-year — below the market consensus by 6% according to Charles Allen, a senior analyst at Bloomberg Intelligence.
Shares in Sainsbury were down more than 11% since the start of the year though Wednesday’s close.
However, rising consumer confidence and a strong loyalty program pushed up grocery sales and offset weakness at its general merchandise arm Argos.
Grocery sales at Britain’s second-largest supermarket rose 5% in the 28 weeks to Sept. 14, boosted by demand for its fresh food and premium store brands, according to a statement Thursday. The grocer’s Nectar loyalty card also helped it “win more big basket shoppers,” Sainsbury said.
Sainsbury’s volume growth is ahead of rivals and it’s making the biggest market share gains in the industry, Roberts said.
Argos sales fell 5% during the same period, hurt by lower demand and some store closures in Ireland.
Sainsbury still expects to report as much as £1.06 billion of underlying retail operating profit this year and said it’s on track to generate at least £500 million of free cash flow.
“Sainsbury is going well, to us, an excellent performance in grocery tinged with frustration and disappointment in Argos, in particular,” wrote Clive Black, a research analyst at Shore Capital, in a note. He said it was clear that challenges in the non-food arm are “eating into the profit progress” in the supermarket division.
Last month, the grocer inked a deal to offload its Argos credit-card portfolio to NewDay Group for £720 million, joining a string of retailers exiting financial services after an unsuccessful attempt to add competition to the sector. Barclays Plc agreed in February to acquire Tesco Plc’s banking business for about £600 million.
Sainsbury’s update comes after its bigger rival Tesco lifted its profit outlook for the fiscal year, citing rising sales as consumers buy more as inflationary pressures subside.
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