Good morning, welcome to Sainsbury's Preliminary Results 2020-2021 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've done an amazing job looking after our customers, their colleagues, and the communities we trade in. We said in our statement, you can see we recognize this with a number of thank you payments through the year, totaling around GBP 100 million. The third lockdown was particularly tough for everybody. 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. It reduced the retail profit that we reported. We are very clear that it was the right thing to do. I set out a clear plan and strategy in November to transform our business over the next three years. We are putting food back at the heart of Sainsbury's. It's early days, of course. I'm encouraged by the early progress we've made. As a business, we've moved at pace to meet the challenges of the last year. We're stronger and more agile as a result. I'll now hand over to the operator to take your questions. Thank you. First question comes from Nick Coulter, Citi. Please go ahead. You're live on the call. Morning, gents. Good morning, Nick. Morning. Morning. Hope you're well. I have three. 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 per annum. I think Kevin talked to tighter working capital in the prepared presentation. Is there anything else that's driving that change, please? Thank you. No, Nick, it's around every line, but working capital is clearly one of the things that's contributing to it. We also have highlighted this morning an unusually low free cash flow in the year we started because of the unwind of working capital from last year. In very simple terms, what's happened there is we had higher sales in quarter four where we got cash from customers, and we paid for those products in quarter one of the new financial year. You get a swing. This year you'll need to really look at the two years, which again, you've seen in the presentation where if you look at the average over the two years to March 2022, you see strong average free cash flow under three years. As you've pointed to, we're very comfortable with the forecast to March 2025 as we continue to focus on converting profit into strong free cash flow for shareholders. I guess my question 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? 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. On cost savings, 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? Thank you. Thanks, Nick. To just recap on the key points we made in November and then bring you up to speed with where we are now. As you say, we laid out a cost saving plan in November to reduce our cost of sales by 200 basis points over three years. As you say, the supply chain and logistics transformation is a key foundation of that plan. Really there are three 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. We can also, to your first question, be more efficient in the stock that we've in the system to do that. That's the first thing we're doing. We're well on with that. We've announced the closure of four 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 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 three years. That's a progressive transformation. We'll do a third this year, a third next year, and a third the year after. The benefits flow year by year. Again, that underpins a key aspect of the GBP 105 million of cost saving in the Argos model that we'll deliver. The third element here is really about how the combination of our supply chain and logistics activities together power 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 and getting product to customers more efficiently. 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. How much is actually changing in the core grocery supply chain? Is it just a case of well, I say just a case, obviously, it's a huge effort, but integrating Argos. What's actually changing in the grocery side, please? I think a couple of key elements there. The first is that we're looking at our depot network, and we've announced the rationalization of some of our depots. In two of our specific larger depots, in fact, in the year just finished, we've completed a reconfiguration. In Hams Hall and Waltham Point, which are two of our largest facilities in the U.K., we've reconfigured those, which has meant we're able to put more capacity through them more efficiently. 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 number one priority here is to make sure that we deliver on the fundamental of good availability in grocery day in, day out. As we effect this cost-saving program, we're too very focused on making sure availability remains strong. You'll have seen in our customer satisfaction performance over the year, we're watching that closely, availability improve year on year. Delivering the cost savings whilst making sure the operational performance is strong. Okay, great. 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 whilst 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. Thank you. Yeah. Thanks, Nick. Just to recap on a couple of the key headlines. The first key point I would make is it's 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, and we're pushing hard to do that. 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. 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. Of course, as we grow online so substantially, the combination of 7.5 + million on the way to 10 digital users, the ability to work with our suppliers through Nectar360. As you describe, this is an extensive and developed platform that we've been building and continue to accelerate. In so I think particularly as online has grown so much, we can just reach so many more customers. 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 the Nectar coalition works across. That enables us to accelerate quickly the number of customers within Nectar. 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 in working with suppliers in a bigger online business, we think this has got significant potential. Okay. Look forward to that. Thank you so much. Thank you. Thanks, Nick. Thank you. Next question comes from the line of Sreedhar Mahamkali, UBS. Please go ahead. You're live on the call. Yeah. Hi, Sreedhar. Morning. Good morning. Thank you for taking my questions. 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 talking about accelerating cost savings. All of that, at least to us, seems to suggest an upside to where consensus is rather than the sort of GBP 620 million. Perhaps if you could help us reconcile why you're not upgrading the PBT outlook for this year, please? That's the first one. Second perhaps is connected, as I say, phasing off the cost savings in terms of the two percentage points, structural cost savings, as well as Argos. How should we be thinking about it over the next two, three years, this year included? Thank you. Sreedhar, thank you. 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. In terms of where we are with guidance, we're comfortable with guidance, and I think we would say we're seven weeks into a new year, clearly, and there is uncertainty more than usual in the year ahead. We don't know how COVID is going to evolve from this point. Of course, there is unpredictability in the customer and economic environment. We're very encouraged by the momentum we're seeing in the business, both in the food business and in general merchandise in Argos. 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 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. We're expecting the continued momentum in food to grow. As you've seen, we've got lower interest costs, too. There's a number of positives there. Also we've got the uncertainty of COVID costs this year. We've got, obviously, the bank performance in the year ahead. We've got some differences in the variable comp as well. Maybe, Kevin, would you just share some of the perspectives in terms of the headwinds we're facing in Q2. Yeah. Just building on that, Sreedhar, 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. To all Simon's points, it's early, it's an uncertain year as far as budgeting at this stage. A big element which we talked to in the presentation is the variable compensation, which was unusually low in the year to March 2020. That creates a headwind of around GBP 50 million-GBP 60 million if we hit performance targets this year. 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. Yeah, maybe just last point on that, Sreedhar, 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%. 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 take into account in that. maybe just Sorry, Simon. No. Just adding some color. Simon talked in his presentation about 1,900 new products arriving. There's a cost to that. There's packaging, there's waste, et cetera, the price investment. It really is a case of investing in the infrastructure and the foundations of the business this year and delivering profit growth reported in the order of 6% versus 2019-2020. Yeah, I think just therefore building on your second question, Sreedhar, about the cost saving. I think 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 we'll talk about value this morning. 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 Aldi and others, which is clearly key in our strategy. The cost saving program at its heart is about fueling investment in the offer, creating the self-help we need to become more competitive on price. I think in the landscape ahead, that's absolutely critical for us. When we look at all of the activities on cost saving, the teams across the business have worked very hard over the last six months to build the plans for this year. We're on with delivering them. I think just two 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. 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 three years, and the benefits will flow pretty equally in each of the three years. 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 seven local fulfilment centres, 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. As you saw, we announced the closure of our counters in November. 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. Sreedhar, the only build on that would be, if you look at slide 54, you can see that illustrates the savings are pretty evenly spread over the next three years. It's not back-end loaded. It's pretty well sort of a third, a third, a third. Got it. If I've missed it, apologies. One last question. 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 cost we should be thinking about, please? Thank you, Sreedhar. I think just to recap, GBP 485 million of the COVID cost in the year just finished. As you say, it's unpredictable in terms of the exact level of cost 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. I think in the range of 10%-15% is the way we're thinking about it of last year's COVID cost 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 operations. That comes with costs, and that would be the view we have at this stage in terms of the amount we should plan and factor in for the first half of this year. Thank you very much for the detailed answers. Appreciate it. Thank you. Next question come from the line of Andrew Gwynn, Exane BNP. Please go ahead. You're live on the call. Good morning, Andrew. Morning, Andrew. Morning. How are we doing? Three questions if I can. Try and keep them quick. First on the Aldi Price Match. Obviously an interesting chart that you put in the pack. Still a net investment, and I suppose the obvious question then is why do it? I suppose the obvious answer is counterfactual, but just would 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. The last one, which is perhaps optimistic, sorry. Variable contribution margin, it's doubled. I was traditionally taught that around about 12% is the figure we should expect for variable contribution in a store. If online has doubled, should we be thinking something in the range of maybe 6%-8%? Thank you very much. Andrew, thank you. I'll take now the price match and online and perhaps Kevin, online or variable contribution margin. Yeah, Andrew, to your question on Sainsbury's Quality, Aldi Price Match, just to recap on the three core value programs that are in place now. 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'll 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. To your question on Sainsbury's Quality, Aldi Price Match, we're pleased with how this has started. We've spent time listening to thousands of customers. As you'd expect, this platform on Sainsbury's Quality, Aldi Price Match is deeply rooted in hearing that customer feedback. Customers wanted two things. They wanted really great value, of course, on these everyday essentials. They wanted it with Sainsbury's quality. 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. We think that's really differentiated in terms of what we're doing there. It's giving strong cut-through in terms of our secondary customers buying into it. We go live today. I hope you had a chance to see the new ad this morning, Eton Mess, definitely worth trying. You can see there at GBP 1.10, fantastic Sainsbury's quality strawberries, price matched to Aldi. In terms of the early results just to the point you make, I think that we were very focused as we launched this strategic value platform that we wanted to ensure the volume came through. The chart particularly that highlights 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. 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. 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. Shall I? Yeah. We then talk about online. O nline conversion, just to sort of give you the sense of latest picture on this. I think obviously we're in a few weeks now where we're starting to see the impacts 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. 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 continue. You've seen in our update on online this morning, the store pick model, we've continued to drive the efficiency of it. We think there's more headroom to go there. We'll continue to improve item pick rates. 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 they come out of online, is the way we're thinking about it. One last data point, which might be helpful. We've seen a quarter of a million customers sign up for Delivery Pass in the year. Those customers, by implication, 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 variable contribution? Andrew, I am unfortunately going to disappoint you and not give you the number 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 groceries online, et cetera, because they obviously share resources, they share assets, they share infrastructure. The way we calculate the contribution from groceries online which has increased fourfold, is we look at all direct costs. 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 costs to that business, it's still profitable. If it was to carry, for example, 18% of all our occupancy and property costs, 18% of our fixed supply chain costs, rate 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. Obviously, if you allocate more fixed costs to groceries online, you give less fixed costs to the other areas of the other channels, and it adjusts. We're very encouraged by when we can see sales, so for example, across the supermarket, sales increased, if you include groceries online store-in-stores and retail walk-in customers up about 11% in the year. Where we had groceries online and a store-in-stores in supermarkets, they were up 18%. Clearly, as you put more sales through each of the boxes, 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, it's coming from a lower margin, but you're losing a higher margin store sale. Yep. Net -net are we looking at a growth in absolute profit from growth in online? Well, net-net, clearly, behind your point is absolutely right. It is less profitable if we do an online delivery than if someone drives to the store and shops for themselves. Then we're looking at all of the levers that we need to manage in that box. Clearly all of the groceries online levers around van utilization, pick rates, et cetera, so we manage that. The front of store costs. You saw, for example, Smart Shop in handset stores with 30% of sales going through Smart Shop. That clearly saves us a lot of labor at the front of the store. There's more to go for, we believe, in improving the box economics. We need to do that because as you've got a greater mix of online, that clearly puts some challenge where customers who were coming into the store have gone online and hence the actions we're taking on the overall box economics. The only last point I would add, Andrew, is on the average basket. I think you've seen in the presentation, we're north of GBP 100. We are holding on to high teens percentage online, and we'd expect still to see a differentiated average basket compared to the wider industry. That's helpful in terms of the economics. As Kevin said, we do still see significant headroom to continue to improve the store pick model, and the team are all over that. 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. Okay, great. Thanks, Kevin and Simon. Thank you. Thanks, Andrew. Thank you. Next question comes from Victoria Petrova, Credit Suisse. Please go ahead. You're live on the call. Hello, Victoria. Thank you very much. Morning. Hello. Thank you very much for taking my questions. I have actually short one 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? 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? What's your view on that? 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? Thank you very much. Victoria, thank you. I'll take each of the questions in turn, and Kevin will comment, I'm sure, if there's anything to add. First of all, in terms of discounters, 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. As we were describing just a few moments ago, we're very focused on our plan to improve value for money for customers. We do think we're in a much stronger price position than we've been at previous key points of time. We've seen a strong switching performance versus the discounters and particularly relative to our other large store competitors. We're very focused on value. We're very focused on making sure we're getting capture on that value. As customer shopping habits inevitably change over the coming weeks and 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 three things really happen in that space. One, our customers valuing the safety of the large store environment. 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 being able to access that full range of products, kind of second point. I think, thirdly, clearly the access to the online environment too, as we've talked about. It's hard to be definitive about the long-term customer change and to what extent it will shift, but I think those three features will be very important. We're focused on delivering against our value plans. We're focused on making sure that 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 customer spend and loyalty that we've seen through the pandemic. That's the first point. In terms of your question on demand, yeah, 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. When we think about what we're doing today, we think we've got a unique online platform today in 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. Just to headline some of the key elements of what we now have. We're delivering clearly home delivery from 250 stores today and getting to 98% of the population with an average basket of GBP 100 at one end of our platform online. At the other end, in terms of on-demand, Chop Chop has now scaled to 17 towns and cities, 40+ stores. Interestingly, with an average basket of north of GBP 30 now, which I think just shows this shift in customer mindset to shop on-demand more extensively and to shop for a wider range of products. Clearly, Uber Eats and Deliveroo is following the same pattern in 200 locations today. 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. 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. 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. There aren't, as we look at it today, any MFC or automation solutions where the economics are immediately compelling. It requires having a parallel operation in the store. As you'd expect, we're 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. Obviously, this expectation around immediacy will become more important. It's continuing to drive the in-store pick model. It's continued to understand the move to immediacy, and it's continued to evaluate the options out there. 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. Also just to point the scale here, just to put it in some context. If this is a GBP 50 million sort of business right now on an annual basis, that's also based obviously at GBP 23 billion. It's relatively small in the great scheme of things. Yes. Thank you very much. That's very helpful. Thanks, Victoria. Next call comes from James Anstead, Barclays. Please go ahead. You're live in the call. Hello, James. Good morning, Simon and Kevin. I've got two questions, if that's okay. The first one is, you're obviously trying very hard to improve your price perception, it just seems a potential missed opportunity to introduce a new strapline with no explicit price or value element. I'm sure thousands of hours are probably spent discussing the change. I wonder if you can talk about why that price element was dropped. The second one is, as you mentioned, SmartShop getting to 30% of sales in the stores with handsets is a pretty impressive number. Just to follow up on that, what does 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 SmartShop. Thank you. Thanks, James. 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. 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. It's a combination of all of those things. 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. You can absolutely expect us to be extending our value credentials as we make this change. 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. I hope when 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. That's absolutely explicit in what we're going to do. It's critical in our plan. In terms of on SmartShop, so you can see, I hope in the presentation this morning that 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. There's the combination of Smart Shop in handset stores, but also on mobile as well as extended. We've seen customers really get more comfortable with using that platform. It's something we continue to push hard. It really works for customers. We think the extension of Nectar is really important with this. As we think to the future, as we look to make Nectar more personal in terms of the offers that we can provide customers, we believe the use of Smart Shop will grow and become more important as a way of connecting with 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. As I said, handset stores is 30%. In hybrid stores where people are using their own mobiles, it's more like 5%- 6%. As far as the percent of the total sales, James or I'll come back to you with that. That's helpful. Thank you. Thanks, James. Thank you. Next question comes from the line of Rob Joyce, Goldman Sachs. Please go ahead. Hi, Rob. Morning. Morning all. I've got three. First one, I think it obviously makes sense to use 2019-2020 as the base year. I wonder if, just to help us understand that year a bit better, if you could tell us why the bonus was so unusually low in 2019-2020, what happened that year? I don't remember. There's 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 thinking it could be around GBP 150 million incremental EBIT in FY 2021, given the gross margin, given the cost savings, and given the considerable operating leverage? 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? The third one, just to do a bit more on your partnerships with the delivery apps. Just wanted to know, are you seeing the immediacy sales as incremental? Do the sales through the third-party apps, are they profitable as they stand? Kevin, you mentioned that it'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? Thank you. Thanks, Rob. Kevin, do you want to pick up on the base year and maybe the profit bridge? Yeah. Then we'll talk about the bonus. Rob, in simple terms, we didn't hit the targets that the Remuneration Committee had set. There's a bit of detail in the annual report in the remuneration report. That's probably in simple terms. Hence, the level of variable pay paid out was lower than we would hope to do if we hit the targets this year. If we move on to the profit bridge, maybe just in terms of your question, Rob, as you'd expect, we're not going to specifically comment on the value of that within the Argos channel. Just to lay out the key components of it, and I'm looking at page 48 in the presentation. Two key elements. The first, as you'll remember, we said in November, we're going to take a more disciplined approach on promotion in the Argos business. That will drive margin benefits, as you say. 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 three years. That delivers broadly proportion over each of the three years. As we move from the standalone stores into store-in-stores, as we adjust to the local fulfilment network, those benefits will flow. There's some other benefits from a cost perspective. Clearly, we've stopped the catalog. We've changed the operating model from the point of view of Check & Reserve. We've taken some benefits as we've integrated the Habitat business. Obviously, the rents and rates benefit flow as we close the standalone 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. Okay. Sorry, very quickly to clarify, does Argos in that sort of guidance for the year, is Argos EBIT in your thinking higher or lower in FY 2022 versus FY 2021? Yeah. It'll be lower than in FY 2021, but I think as you can see in the chart, standing back from the plans we put in place, the delta in profitability from 2019-2020 to this year is a significant shift in profitability. Clearly the sales 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. Okay. Thank you. On demand, 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 scaled business across Chop Chop, Deliveroo and Uber Eats. Small in proportion of the overall business, but I think a very important learning for us. Remembering the fact that we've been doing Chop Chop now for just over four years, and the team have been working really hard to understand the incrementality, and also the efficiency of that model, too. There's no doubt that there is some incrementality in there. It's a very different customer mission to be able to access a grocery delivery within 30 minutes to a planned next day delivery that you may put a slot in clearly days or longer in advance. There is incrementality in there. We're working on understanding the scale of that. I think we're very clear that we need to be in this mission for customers. The market's 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. If we look at where this will be in four or five years' time, I think that this will be the element of how customers shop that will move significantly, and we therefore need to be in that space. Thanks, Simon. Really helpful. Are the orders through the third parties, are they profitable yet through the third party apps, at the basket level you spoke about? Yeah, the key point there, as you just said, Rob, is the basket level. 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. Too early to say yet in terms of where that will land, and we'll give you more color on that as the next 6- 12 months open up. Rob, the other element, the orders make a small contribution. The question is how much is incremental? It's early days, so we're just measuring that. Okay. All right. Thank you. Can I just pick up James' point on the SmartShop as well before the next question? If we look at supermarkets, it's about 17% of sales. Thanks, Kevin. Thank you. Next question comes from the line of Xavier Le Mené, BofA Securities. Please go ahead. You are live in the call. Morning, Xavier. Good morning. Thank you for taking my question too, if I may. The first one, we've seen some of your initiatives like removing your counters, following actually some of your competitors. I just want to understand how you see Sainsbury's today and how you compare or how you differentiate actually yourself with your peers? 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. Have you seen any change in the recent weeks, and how you comment, for instance, the Kantar data we have seen yesterday with actually showing low inflation at all, actually some deflation? What is your view going forward about inflation? Xavier, thank you. I'll take each of those in turn. First one in terms of the differentiation in the offer. As you say, we announced in November that we were closing the counters in meat, fish and poultry, and deli in our stores because we'd seen customer demand for products in those parts of the store decline, not just through COVID, but over an extended period of time. 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 for customers, is to significantly grow the level of innovation in our food offer. You'll see us this year treble 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. We'll land, for example, over 400 new products over the coming weeks as we go into this summer. A summer where we think customers will spend a lot of time with family and friends, a summer of celebration at home. 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 existing design of a further around 1,900. In total, somewhere just short of 4,000, either new or improved products this year coming into the offer. 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 change. In certain areas of customer behavior, for example, dairy alternatives, 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. As we've done that, we've seen customers buy into that. 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 onto a couple of the earlier questions. Three things would be, I think, essentially here. 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. 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 really deliver on customer satisfaction with clear improvements both in the supermarket environment and in the convenience environment in areas like availability, speed of service, friendliness 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. 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. On the Kantar 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 two year numbers given that they give, I think, a clear read of the momentum in the business on a two year basis. You can see, both over four and 12 weeks when we look at that period, that the work we're doing on value and innovation and online is showing up in our relative performance on Kantar. Look, no room for complacency on this at all. We're very focused on making sure we sustain that momentum as we look ahead. Thank you. Thank you. Next question comes from Borja Olcese, JPMorgan. Please go ahead. You're live on the call. Hi, team. Good morning. Morning. May I ask on your views or learnings on the Getir, Zapp, and Gorillas and all these guys? Do you think they can become another source of pressure for your convenience business or not at this stage? Would you mind just repeating the question for me? I'm really sorry. I think the line was just a bit crackly. I couldn't hear your question properly. Apologies. [audio distortion] Gorillas, 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'm really sorry. It was quite a tough line to hear. 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? No, it's more if you look at Getir, Zapp, and Gorillas, all these new speed convenience. Yeah. Okay. offers, if they can become a source of pressure for your convenience business. Yeah, thank you. I think we've got the question. Apologies. It was a little hard to hear there. I think two key points I would make, 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 have been 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. 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 convenience estate is that the vast majority of those stores are in local communities, close to where people live. 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 three 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. 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. Those that are where customers are living are up 13%. We're going to open a further 25- 30 stores in each of the three years as we look ahead. 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 for customers. The one last thing I would say is that clearly these convenience stores in Sainsbury's, the 200 Uber Eats and delivery locations and Chop Chop, are being fulfilled from convenience stores. Thanks for the thoughts. Thank you. Thanks, Borja. Thank you. Last question from Tom Davies, Berenberg. Please go ahead. You're live on the call. Hi, Tom. Morning. Morning, Tom. Just two questions from me. Firstly, just on retail profitability. You've seen supplier income fall by about GBP 80 million this year. Can you quantify how much was that from the cancellation of the Argos catalog? I guess more importantly, do you expect that to inflect with the Nectar360 initiatives? Secondly, Simon, on the second relates to the banking business. Simon, on the presentation you gave, you said you have continued discussions with potential counterparties. 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. I'll take the second question first and then ask Kevin to pick up on your questions in terms of the retail profitability numbers. 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 at 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. You can see in each of those elements how that's come through. Clearly it's been a difficult year, and you can see within 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. Where we are today is we continue to evaluate those, but it's not something that 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. 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 pick up on first? Yeah, Tom, on supplier income, there's a lot of moving parts, as you can imagine. Catalog is an element of it. With some suppliers, there's change in trading arrangements where there's more in the base margin. Fewer promotions is the key driver here year on year, and you'll see that across the industry. We reduced promotions in the year. You'll see that right across the industry. That's the biggest driver. Thanks, Kevin. Thanks, Tom. Thank you. No further questions. 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. 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.