business news in context, analysis with attitude

Global notes & commentary from…

This last week has not been the most auspicious start for Justin King, who has just taken up the helm as Sainsbury’s new CEO, having vacated his post as head of food at M&S. Just three days before his arrival, Sainsbury’s delivered a triple whammy: the sale of its US business to Albertsons, disappointing trading results for 2003 and the resignation of Deputy Managing Director Sara Weller.

On 26 March, Sainsbury’s announced that it had sold its US supermarket subsidiary Shaw’s to Albertsons, the fourth-largest grocery retailer in the US, for $2.5 billion. The sale will generate an exceptional pre-tax profit in excess of USD409 million in the fiscal year to the end of March 2005, with the disposal due to take place in early May. Shaw’s operates 202 stores, largely hypermarkets and superstores, around New England. The acquisition will enhance Albertsons position within the US, with an additional GBP3 billion USD5.5 billion worth of sales enlarging its business to around $42.5 billion (taking it ahead of the rapidly-shrinking Ahold and giving it a stake in the prosperous northeastern seaboard.

Sainsbury’s has stated that it will use the proceeds from the sale to invest in its UK business with around half of the money going towards the cost of acquiring 20 stores from three retailers and the rest towards further investment opportunities, particularly in the convenience store sector.

On the same day, Sainsbury’s revealed a disappointing set of trading results for the fourth quarter and full 2003 fiscal year. Total sales for its UK supermarket business, grew by just 1.4% last year with sales in its fourth quarter up by just 0.8%. Like-for-like sales were down 0.2% for the year and down 0.9% for the quarter, making it the worst performing grocery retailer in the UK, and the only major grocer to experience negative like-for-likes.

Sir Peter Davis, who stepped up to the role of Chairman at the end of March, attributed this failure to attract sales to the “resumption of the Business Transformation Programme”. However, time is running out for the retailer to hide behind this weak façade, with the much vaunted three-year programme coming to an end this summer, having resulted in an overhaul of the supply chain, the implementation of new IT infrastructure and a store modernization programme.

To top it all, Sainsbury’s is struggling to keep its top management with Sara Weller, Deputy Managing Director of Sainsbury’s Supermarkets, the latest to jump ship. Sara has been with the business for three years and was instrumental in developing a highly complex customer segmentation system designed to enable the grocer to develop new store formats based on shopping behaviour. Many of these store definitions have since been dropped with the Savacentre fiasco being the highest profile u-turn.

Sara joins a growing list of notables to quit the company – Keith Evans, trading director for non-foods, left earlier in the month, not long after the shareholders’ revolt over a new chairman, as did Christophe Roussel, head of sourcing for non-food, who joined Tesco in December.

Strategically, the sale of Shaw’s has been on the cards for some time now. With a US market share of 0.3%, Shaw’s represented just a toe in the water for Sainsbury’s. However, although it was never going to be more than a small regional player in the context of the entire US market, it was a key local operator, holding the number two position in New England behind Ahold’s Stop & Shop with a market share of 20%. Moreover, it accounts for a significant (16%) of Sainsbury’s total business.

In addition to missed revenue, the sale of Shaw’s also represents a loss of shared expertise with the two companies exchanging ideas on merchandising, own labels and product ranges. Shaw’s is an aggressive and dynamic retailer, enjoying relatively good trading activity on the back of a spate of acquisitions since 2000. Whilst the acquisition represents a positive move for Albertsons’ national ambitions, for Sainsbury’s it signals a retreat from the international arena, following its withdrawal from Egypt in 2001, and a loss of status from being the 18th largest grocery retailer in the world to the 23rd, along with a resultant loss in buying power. Whilst its compatriot Tesco is busy expanding, Sainsbury’s is retreating.

So what of the future for Sainsbury’s? It shouldn’t be forgotten that, although the retailer has lost its way over the last few years, it still has a very strong store portfolio with 307 superstores and hypermarkets, over 100 supermarkets and a growing network of convenience stores. What it needs to do is really assert itself to the consumer and carve out a clearly defined image with improved stock availability across the estate. If it is to focus on price, as Justin King has previously stated it should, then it faces the superior buying power and stronger price-led brand image of Wal-Mart’s Asda, Tesco and Morrisons. Conversely, if quality is to be its mantra then it competes with a resurgent Marks & Spencer and Waitrose, both of which are enjoying sales growth at the premium end of the market. At the moment, it is stranded somewhere in between with consumers voting with their feet to Sainsbury’s detriment.

Although Sainsbury’s has stated that it sees plenty of opportunities in c stores, these cannot be wholly viewed as its saviour. Even for Tesco, which has stolen the lead in this market, c-stores represent just 6% of its UK business, and it is still the larger store formats which drive the operation with their potential for non-food sales and value added grocery. With its poor track record of late, King has the opportunity to turn the business around and reposition it, but the question remains can he do it whilst Davis is in place and the founding family still has such a high stake?
KC's View: