Portfolio 238664 Sainsburys Recovery Plan

8/2/2019 Portfolio 238664 Sainsburys Recovery Plan

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SAINSBURY Vs TESCO

SAINSBURYS STRATEGIC

RECOVERY PLAN


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SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

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TABLE OF CONTENTS

1. INTRODUCTION ------------------------------------------------------------------------------------------------------------ 2

2. COMPETITIVE ANALYSIS OF SAINSBURY & TESCO FINANCIAL POSITIONS ----------------------- 2

i. Sainsburys Financial and Competitive Position ----------------------------------------------------------------------- 2

ii. Financial AnalysisSainsbury ------------------------------------------------------------------------------------------- 5

iii. Financial AnalysisTesco ------------------------------------------------------------------------------------------------ 7

iv. Sainsbury SWOT Analysis ------------------------------------------------------------------------------------------------- 9

3. PROPOSED SAINSBURYS RECOVERY PLAN-------------------------------------------------------------------- 10

i. Investment Strategies for Recovery -------------------------------------------------------------------------------------- 10

ii. Key Financials Underpinning Investment Strategies ------------------------------------------------------------------ 10

iii. Resources Required to Implement Investment Strategies ------------------------------------------------------------- 11

4. KEY FINANCIAL PROJECTIONS ------------------------------------------------------------------------------------- 11

i. Summary of Sainsburys Key Financials Post Recovery ----------------------------------------------------------- 11

ii. Impact of Investment Strategies on Sainsburys Key Financials ---------------------------------------------------- 11

5. INVESTMENT APPRAISAL OF INVESTMENT PROJECTS --------------------------------------------------- 11

i. Summary of Investment Strategy ----------------------------------------------------------------------------------------- 11

ii. Investment Appraisal ------------------------------------------------------------------------------------------------------ 13

6. SOURCES OF FINANCE AND THE COST OF CAPITAL -------------------------------------------------------- 14

i. Sainsburys Investment Funding Plan and Revised Capital Structure ---------------------------------------------- 14

7. RISK ASSESSMENT ------------------------------------------------------------------------------------------------------- 14

i. Identified Risks and Impact on Sainsburys Cost of Capital--------------------------------------------------------- 14


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1. INTRODUCTION

Sainsbury and Tesco are two largest grocery retail chains primarily operating in United Kingdom.Sainsbury, once the market leader, has gradually lost its market share to Tesco over time and Tesco

has now emerged the market leader in grocery retail industry. In this assignment, I am required to

analyze Sainsbury and Tescos financial and competitive positions by doing strategic and financial

statement analysis for the last five years. On the basis of such analysis, I am required to propose a

strategic recovery plan for Sainsbury, outlining key investment strategies to be undertaken, evaluating

proposed investment strategies to be undertaken and identifying the risks involved therein and also

evaluatingthe impact of such investment strategies on Sainsburys financial and competitive position.

In this assignment, I have used various tools and techniques available for such financial and

competitive analysis, including but not limited to Value Chain Analysis, Porters Five Forces Model,

BCG Growth Matrix and traditional financial statement and ratio analysis. I wouldnt have been able

to produce following structured analysis and propose recovery strategies had I not utilized such tools

and techniques of financial and competitive analysis.

2. COMPETITIVE ANALYSIS OF SAINSBURY & TESCO FINANCIAL POSITIONS

i. Sainsburys Financial and Competitive Position

Over the last five years, Sainsbury has been noticeably different and lagging behind Tesco on number

of fronts and consequently such factors had contributed towards its downfall. A summary of such

differences is outlined below.

Low Profitability Relative to Tesco

Over the last five years, Sainsbury has been living on relatively low operating profit margins due to

number of factors. Major ones are concentration on low margin products, inefficiencies in controlling

costs and lack of value added through suppliers chain. As shown by the following graphs, Sainsbury is

lagging behind Tesco in EBITDA margin and net profit margin.


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Such low profitability has also resulted in relatively low return on invested capital and return on equity

ratios despite not many differences in the utilization of capital and use of leverage.

Low Sales Growth Relative to Tesco

Another factor that has contributed to the downfall of Sainsbury over the last few years is its low sales

growth relative to Tesco as shown by the following graph.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2001A 2002A 2003A 2004A 2005A 2006A

EBITDA Margin

Tesco Sainsbury

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2001A 2002A 2003A 2004A 2005A 2006A

EBIT Margin

Tesco Sainsbury

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2001A 2002A 2003A 2004A 2005A 2006A

Return on Invested Capital

Tesco Sainsbury

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

2001A 2002A 2003A 2004A 2005A 2006A

Return on Equity

Tesco Sainsbury


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Despite high sales growth of Tesco in Asia, the major sales growth contribution of Tesco has come

from UK alone. The following charts can better present the Tescos sales growth contribution story.

A number of factors have contributed to such low sales growth of Sainsbury. The major ones are high

payout ratios, non-responsiveness to Tescos convenient stores strategy and complacent / risk averse

attitude towards growth strategies.

88%

8%

4%

85%

9%

6%

82%

10%

8%

80%

11%

9%

80%

11%9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2002 2003 2004 2005 2006

GEOGRAPHICAL SALES MIX - TESCO

UK Rest o fEurope

Asia

7.8%

2.1%2.6%

6.4%

2.1%2.7%

13.3%

2.8%

2.5%

7.7%

1.4%

1.1%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2003 2004 2005 2006

Tesco's Geographical Weighted Sales Growth

TescoUK

TescoRest ofEurope

TescoAsia


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ii. Financial Analysis Sainsbury

SAINSBURY

2001A 2002A 2003A 2004A 2005A 2006A

Liquidity

Current ratio 0.74 0.55 0.47 0.30 0.20 0.68

Acid test ratio 0.46 0.43 0.51 0.34 0.36 0.48

Profitability

EBITDA margin 5.9% 5.8% 6.6% 6.6% 3.8% 4.3%

EBIT margin 3.3% 3.7% 3.8% 3.6% -1.1% 1.4%

Net profit margin 2.3% 2.2% 1.9% 1.9% -1.2% 0.4%Return on invested capital 6.5% 6.1% 4.1% 3.8% -1.9% 2.0%

Return on equity 7.2% 7.3% 5.0% 5.0% -4.5% 1.5%

Efficiency

Operating capital turnover 2.55 2.63 1.92 1.81 2.42 2.54

Invested capital turnover 2.53 2.59 1.92 1.80 2.43 2.53

Receivable turnover (days) 13 9 8 10 8 6

Inventory turnover (days) 21 20 26 24 16 16

Payable turnover (days) 57 57 73 69 60 58

Growth

Sustainable growth rate 0% 2% 2% 1% 0% 3%

Sales growth (YoY) 0.0% 7.5% -17.8% 2.4% 5.3% 6.5%

Earnings per share growth (YoY) 0.0% 3.6% -29.0% 2.7% -178.2% -130.9%

Dividend per share growth (YoY) 0.0% 3.7% 4.5% 0.7% -3.7% -48.7%

Financial Risk

Gearing ratio 21.3% 23.3% 28.3% 32.4% 34.3% 38.5%

Debt-equity ratio 0.27 0.30 0.39 0.48 0.52 0.62

Interest coverage ratio 6.91 12.80 8.98 8.70 (1.95) 1.82

Investment Ratios

Dividend payout ratio 94% 77% 65% 76% 92% -136%

Dividend per share (Pence) 14.19 14.72 15.38 15.49 14.92 7.66

Earnings per share (Pence) 15.02 19.16 23.64 20.28 16.16 (5.61)

Book value per share (Pence) 256.89 262.41 271.59 278.88 241.66 228.52


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SAINSBURY FINANCIAL STATEMENTS

GBP Millions

Income Statement 2001A 2002A 2003A 2004A 2005A 2006A

Sales (excldg. VAT) 15,954 17,154 14,104 14,440 15,202 16,061

Cost of goods sold (13,089) (13,982) (11,386) (11,512) (12,765) (13,180)

Gross profit 2,865 3,172 2,718 2,928 2,437 2,881

Selling & general expenses (1,918) (2,169) (1,781) (1,981) (1,861) (2,183)

EBITDA 947 1,003 937 947 576 698

Depreciation & Amorization (422) (376) (398) (425) (748) (470)

EBIT 525 627 539 522 (172) 228

Interest expense, net (76) (49) (60) (60) (88) (125)

Other net income 67 (5) (8) 17 22 1

Profit before tax 516 573 471 479 (238) 104

Taxes (157) (200) (206) (206) 51 (46)

Net profit 359 373 265 273 (187) 58

Items recognized directly in equity 10 (1) (4) (10) 87 (154)

Comprehensive income b4 discont. Ops. 369 372 261 263 (100) (96)

Discontinued operations (79) (1) 197 131 375 -

Comprehensive income after discont. Ops. 290 371 458 394 275 (96)

GBP Millions

Balance Sheet 2001A 2002A 2003A 2004A 2005A 2006A

Cash 998 999 1,209 771 796 1,080

Accounts receivable 563 417 310 394 319 276

Inventories 763 751 800 753 559 576

Other net current assets (713) (878) (1,211) (1,233) (1,237) (411)

Total current assets 1,611 1,289 1,108 685 437 1,521

Accounts payable (2,058) (2,200) (2,274) (2,191) (2,093) (2,094)

Accrued liabilities (127) (140) (98) (85) (125) (154)

Non-interest bearing current liabilities (2,185) (2,340) (2,372) (2,276) (2,218) (2,248)

Operating working capital (574) (1,051) (1,264) (1,591) (1,781) (727)

Gross property, plant and equipment 8,979 9,882 10,648 11,314 10,469 10,741

Accumulated depreciation (2,764) (2,976) (3,108) (3,100) (3,393) (3,681)

Net property, plant and equipment 6,215 6,906 7,540 8,214 7,076 7,060

Intangible assets 278 263 226 208 203 191

Investment properties - - - - - -

Other net operating assets 329 412 860 1,163 773 (194)

Operating invested capital 6,248 6,530 7,362 7,994 6,271 6,330

Other net assets 58 93 (26) 24 (11) 23

Total Invested Capital 6,306 6,623 7,336 8,018 6,260 6,353

Liabilities and equity

Interest bearing debt 1,346 1,542 2,074 2,599 2,147 2,431

Derivatives - - - - - 12

Interest bearing debt, adjusted 1,346 1,542 2,074 2,599 2,147 2,443

Total shareholders' equity (incldg. Minority Int.) 4,804 4,909 5,072 5,185 4,112 3,965

Deferred tax, net 156 172 190 234 1 (55)

Adjusted equity 4,960 5,081 5,262 5,419 4,113 3,910

6,306 6,623 7,336 8,018 6,260 6,353


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iii. Financial Analysis Tesco

TESCO

2001A 2002A 2003A 2004A 2005A 2006ALiquidityCurrent ratio 0.57 0.62 0.61 0.66 0.62 0.66Acid test ratio 0.18 0.20 0.16 0.23 0.22 0.24

ProfitabilityEBITDA margin 7.8% 7.8% 8.0% 8.1% 7.8% 7.7%

EBIT margin 5.6% 5.6% 5.7% 5.6% 5.6% 5.6%Net profit margin 3.4% 3.5% 3.6% 3.6% 4.0% 4.0%

Return on invested capital 9.2% 9.2% 8.6% 9.1% 10.2% 10.7%Return on equity 13.3% 13.8% 13.4% 12.9% 14.8% 16.3%

EfficiencyOperating capital turnover 2.48 2.38 2.14 2.29 2.46 2.62Invested capital turnover 2.40 2.31 2.09 2.24 2.39 2.53Receivable turnover (days) 6 7 9 10 8 8Inventory turnover (days) 18 18 20 18 19 18

Payable turnover (days) 58 59 67 66 72 62

GrowthSustainable growth rate 8% 7.9% 7.7% 7.3% 9.4% 10.3%Sales growth (YoY) 0.0% 12.7% 9.9% 18.5% 9.9% 6.5%Earnings per share growth (YoY) 0.0% 14.1% 10.1% 9.8% 21.2% 15.6%Dividend per share growth (YoY) 0.0% 13.7% 9.8% 9.8% 3.6% 10.8%

Financial RiskGearing ratio 38.1% 41.3% 43.2% 37.8% 35.6% 37.5%Debt-equity ratio 0.62 0.70 0.76 0.61 0.55 0.60

Interest coverage ratio 9.33 8.64 8.24 7.78 14.40 17.31

Investment RatiosDividend payout ratio 47% 47% 47% 47% 40% 38%Dividend per share (Pence) 4.90 5.58 6.12 6.72 6.96 7.71Earnings per share (Pence) 10.40 11.87 13.37 12.30 15.67 16.89

Book value per share (Pence) 78.13 85.87 97.60 111.48 117.38 123.53


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TESCO FINANCIAL STATEMENTS

GBP Millions

Income Statement 2001A 2002A 2003A 2004A 2005A 2006A

Sales (excldg. VAT) 20,988 23,653 26,004 30,814 33,866 39,454

Cost of goods sold (16,877) (19,006) (20,773) (24,471) (25,296) (29,686)

Gross profit 4,111 4,647 5,231 6,343 8,570 9,768

Selling & general expenses (2,469) (2,791) (3,143) (3,854) (5,935) (6,740)

EBITDA 1,642 1,856 2,088 2,489 2,635 3,028

Depreciation & Amorization (476) (534) (604) (754) (734) (829)

EBIT 1,166 1,322 1,484 1,735 1,901 2,199

Interest expense, net (125) (153) (180) (223) (132) (127)

Other net income 7 19 36 59 123 159

PBT 1,048 1,188 1,340 1,571 1,892 2,231

Taxes (327) (358) (394) (469) (539) (645)

Net profit 721 830 946 1,102 1,353 1,586

Items recognized directly in equity - - 22 (157) (127) (243)

Comprehensive income b4 discont. Ops. 721 830 968 945 1,226 1,343

Discontinued operations - - - - (6) (10)

Comprehensive income after discont. Ops. 721 830 968 945 1,220 1,333

Balance Sheet 2001A 2002A 2003A 2004A 2005A 2006A

Cash 534 670 638 1,100 1,146 1,325

Accounts receivable 322 454 662 840 769 892

Inventories 838 929 1,140 1,199 1,309 1,464

Other current assets - - - - - -

Total current assets 1,694 2,053 2,440 3,139 3,224 3,681

Accounts payable (2,684) (3,061) (3,799) (4,456) (4,974) (5,083)

Accrued liabilities (292) (259) (230) (308) (224) (464)

Non-interest bearing current liabilities (2,976) (3,320) (4,029) (4,764) (5,198) (5,547)

Operating working capital (1,282) (1,267) (1,589) (1,625) (1,974) (1,866)

Gross property, plant and equipment 12,683 14,510 16,625 18,197 18,545 20,270

Accumulated depreciation (3,103) (3,478) (3,797) (4,103) (4,024) (4,388)

Net property, plant and equipment 9,580 11,032 12,828 14,094 14,521 15,882

Intangible assets 154 154 890 965 1,408 1,525

Investment properties - - - - 565 745

Other net operating assets - - - - (735) (1,211)

Operating invested capital 8,452 9,919 12,129 13,434 13,785 15,075

Other net assets 304 317 312 328 396 528

Total Invested Capital 8,756 10,236 12,441 13,762 14,181 15,603

Liabilities and equity

Interest bearing debt 3,340 4,230 5,377 5,200 5,045 5,388

Derivatives - - - - - 463

Interest bearing debt, adjusted 3,340 4,230 5,377 5,200 5,045 5,851

Total shareholders' equity (incldg. Minority Int.) 5,014 5,566 6,559 7,990 8,654 9,444

Deferred tax, net 402 440 505 572 482 308

Adjusted equity 5,416 6,006 7,064 8,562 9,136 9,752

8,756 10,236 12,441 13,762 14,181 15,603


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iv. Sainsbury SWOT Analysis

Strengths

Brand recognition Quality products Presence in USA Presence in banking sector

Weaknesses

Non availability of non-food products Product range attracting few

communities

Few stores at convenient locations Relatively high prices of various products Limited presence out of UK Lack of strategic alliance with suppliers Substandard sales growth Inefficiencies in expense control Concentration on low margin products Non-responsiveness to competitors

strategies

Opportunities

Roll out new products Enter into new markets Cater to needs of all communities Invest in technology to reduce operational

cost

Threats

Losing sales to competitors Flight of key personnel due to low

growth

Entrance of foreign retail chains in UK


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3. PROPOSED SAINSBURYS RECOVERY PLAN

i. Investment Strategies for Recovery

On the basis of above mentioned financial and competitive analysis, I suggest the following strategiesfor the recovery of Sainsbury.

Plan A: Opening of new small (convenient) stores at various locations throughout UK

Plan B: Entering into new markets like Pakistan, China, India, Brazil and Russia where populationgrowth along with economic growth is high and one can capture the first mover

advantage.

Plan C: Rolling out new product stream of big ticket and high margin items and launchingproducts that catered to the needs of various communities in UK to attract newcustomers.

ii. Key Financials Underpinning Investment Strategies

Plan A: No. of stores to be opened 1,500

Sales per store per annum .. GBP 7.5 million

Operating profit margin. 3.5%

Fixed Capital Investment per store GBP 1.5 million

Plan B: Total no. of stores to be opened 100 (20 stores in each country)

Sales per store per annum... GBP 20 million


Fixed Capital Investment per store GBP 4 million

Plan C: Increase in sales per annum... GBP 2 million

Operating profit margin 10.5%

Fixed Capital Investment GBP 0.5 million


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iii. Resources Required to Implement Investment Strategies

Total financial resources required to implement Plan A, Plan B and Plan C is GBP 2,650.5 million.Plan A requires an initial investment of GBP 2,250 million, Plan B requires an initial investment of

GBP 400 million, whereas Plan C requires an investment of GBP 0.5 million. Since the target debtratio (gearing) is set at 40pc keeping in perspective financial flexibility and risk appetite, all

incremental resources are financed in the ratio of 40% debt and 60% equity.

4. KEY FINANCIAL PROJECTIONS

i. Summary ofSainsburys KeyFinancials Post Recovery

After implementing the plans A, B and C, Sainsbury key financial would be as follows:

Sales growth... 82.5%

EBIT Margin.......... 2.4%

Net Profit Margin... 1.1%

ii. Impact of Investment Strategieson Sainsburys Key Financials

By implementing investment plans A, B and C, Sainsburys profitability has improved a lot andsales growth has achieved a significant mark of 82%. Such phenomenal growth, though not

sustainable over the long run, yet, such growth would put Sainsbury on the route of recovery.

5. INVESTMENT APPRAISAL OF INVESTMENT PROJECTS

i. Summary of Investment Strategy

Plan A: Since Sainsbury started to struggle and losing its market share when Tesco adopted theaggressive growth strategy of building convenient stores throughout UK, it is vital for Sainsbury tobecome more competitive and follow the same strategy of convenient stores to get advantage ofeconomies of scale that Tesco is enjoying currently.


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I suggest that Sainsbury establish 1,500 new convenient stores to attract new customers and to put itssales on a growth trajectory. Further details of the plan are as follows:

Sales per store per annum .. GBP 7.5 million


Fixed Investment per store GBP 1.5 million

Plan B: It is vital for Sainsbury to try new markets and capture the benefits of first mover advantage. Isuggest that Sainsbury invest in markets like Pakistan, India, China, Brazil and Russia wherepopulation and economic growth shows an uptrend. Further details of the plan are as follows:

Total no. of stores to be opened 100 (20 stores in each country)

Sales per store per annum... GBP 20 million


Fixed Capital Investment per store GBP 4 million

Plan C:Another major factor that is affecting Sainsbury is its low profitability that results in relativelylow profit margins and low return on investments. I suggest Sainsbury launch new products that are

big ticket and high margin items and bring in products that cater to the needs of other communities inUK. Further details of the plan are as follows:

Increase in sales per annum... GBP 2 million

Operating profit margin 10.5%

Fixed Capital Investment GBP 0.5 million


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ii. Investment Appraisal

Plan A:NPV @ 10.0% p.a.APPRAISAL DATE: 31-Dec-06

OPTION NUMBER & TITLE: Plan A - Opening 1,500 Convenient Stores in UK

GBP Mil

CAPITAL COSTS Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 TOTA

Plan A 2,250- 2,2-

A. Total Capital Costs (Annual) 2,250- - - - - - - - - - - 2,2-

CURRENT COSTS Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 TOTA

Plan A 10,856- 10,856- 10,856- 10,856- 10,856- 10,856- 10,856- 10,856- 10,856- 10,856- 54,2-

C. Total Revenue Costs (Annual) - 10,856- 10,856- 10,856- 10,856- 10,856- 10,856- 10,856- 10,856- 10,856- 10,856- 108,5-

INCOME Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 TOTA

Plan A 11,250 11,250 11,250 11,250 11,250 11,250 11,250 11,250 11,250 11,250 56,2

G. Total Income - 11,250 11,250 11,250 11,250 11,250 11,250 11,250 11,250 11,250 11,250 112,5

NPV CALCULATION Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 TOTA

Net Undiscounted Cash Flow 2,250- 394 394 394 394 394 394 394 394 394 394 2-

DISCOUNT FACTOR @ 10% p.a. 1.000 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386

ANNUAL NET PRESENT VALUE 2,250- 358 325 296 269 244 222 202 184 167 152 7-

TOTAL NET PRESENT VALUE = 169

Plan B:NPV @ 10.0% p.a.

APPRAISAL DATE: 31-Dec-06

OPTION NUMBER & TITLE: Plan B - Opening 100 New Stores in China, India, Pakistan, Brazil and Russia

GBP Mill


Plan B 400- 4-

A. Total Capital Costs (Annual) 400- - - - - - - - - - - 4-


Plan B 1,910- 1,910- 1,910- 1,910- 1,910- 1,910- 1,910- 1,910- 1,910- 1,910- 9,5-

C. Total Revenue Costs (Annual) - 1,910- 1,910- 1,910- 1,910- 1,910- 1,910- 1,910- 1,910- 1,910- 1,910- 19,1-


Plan B 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 10,0

G. Total Income - 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 20,0


Net Undiscounted Cash Flow 400- 90 90 90 90 90 90 90 90 90 90


ANNUAL NET PRESENT VALUE 400- 82 74 68 61 56 51 46 42 38 35 -



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Plan C:NPV @ 10.0% p.a.

APPRAISAL DATE: 31-Dec-06

OPTION NUMBER & TITLE: Plan C - Launching Big Ticket and High Margin Items

GBP Mill


Plan C 1- -

-

-

A. Total Capital Costs (Annual) 1- - - - - - - - - - - -


Plan C 2- 2- 2- 2- 2- 2- 2- 2- 2- 2- -

-

-

C. Total Revenue Costs (Annual) - 2- 2- 2- 2- 2- 2- 2- 2- 2- 2- -


Plan C 2 2 2 2 2 2 2 2 2 2 -

-

G. Total Income - 2 2 2 2 2 2 2 2 2 2


Net Undiscounted Cash Flow 1- 0 0 0 0 0 0 0 0 0 0


ANNUAL NET PRESENT VALUE 1- 0 0 0 0 0 0 0 0 0 0


6. SOURCES OF FINANCE AND THE COST OF CAPITAL

i. Sainsburys Investment Funding Plan and Revised Capital Structure

Total investment required to implement Plans A, B and C is GBP 2,650.5 million. Since 40% is to befinanced with debt and rest with equity, I dont suggest change in capital structure of Sainsbury as Ibelieve target debt ratio of 40% is in line with financial flexibility and risk appetite of Sainsbury.

7. RISK ASSESSMENT

i. Identified Risks and Impact onSainsburys Cost of Capital

With high growth comes risk. Since Sainsbury is investing in emerging markets, it is exposed to more risks thanpreviously. Specifically, it will be exposed to political risk, credit risk, event risk, exchange rate risk and legalrisk. The impact of such risks on Sainsbury would be an increase of its equity beta among investors andconsequently a rise in cost of capital to compensate for additional risks.

Portfolio 238664 Sainsburys Recovery Plan

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