What's going on?

Shares of British grocer Sainsbury�s sold off 5% on Wednesday, after the company said its profit fell 8% over the past year and warned that the overall environment was likely to get tougher!

What does this mean?

Last year, Sainsbury�s bought household goods retailer Argos in an effort to diversify away from the grocery business. The cost of integrating Argos (e.g. installing Argos outlets within large Sainsbury�s stores) were partly to blame for the drop in Sainsbury�s profit. However, even stripping out the impact of one-time things like that, Sainsbury�s profit still declined. Sainsbury�s also said it would pay out less cash to investors this year than it did last year (a.k.a. it�s cutting its dividend) � which is rarely a popular move with investors.

Why should I care?

The bigger picture: Sainsbury�s warned that storm clouds are brewing over the UK economy.

While the UK economy initially held up following the Brexit vote, Sainsbury�s says this is now changing. Sainsbury�s specifically pointed out that higher prices (which are due partly to the post-Brexit selloff of the pound) would likely harm consumer spending as people have, effectively, less money to spend (since wage growth hasn�t been increasing). Since consumer spending makes up about two-thirds of Britain�s economy, the threat to overall economic growth is very significant.


For markets: Consumer-facing companies in the UK are stuck between a rock and a hard place.

In most instances, companies are having to pay more for the goods they sell. This is true of retailers, like Sainsbury�s, who import most of the products they sell. But it�s also true of companies that make things in the UK since many of the raw materials, like the steel that goes into British-made cars, must be be imported as well. These companies have a choice: fully pass on their increased costs to their customers at the risk that customers will buy fewer goods from them, or absorb some of the increased costs themselves. Neither option is good for profits.