Sainsbury’s has food for thought

On the face of it, Sainsbury’s group finance director Roger Matthews presented respectable figures for the last full year ending 31 March 03.

Underlying pre-tax profit was up 10.8% with underlying earnings per share up 12.8%.

However, the £18.5bn giant is working in an increasingly competitive marketplace and its margins are below the 6% leading edge for the sector. Sales rose only 1.6% and a bid for Safeway was knocked back, so growth through acquisition is out, at least for the time being. Then there is the pension deficit: £607m at 2002/03 valuations. Next week’s interim figures will be closely watched.

Group chief executive Sir Peter Davis introduced a three-year, £2bn programme of infrastructure changes on his arrival at the supermarket in 2000. His transformation plan is due to end in March 2004, and he has been told that he has the Sainsbury family’s backing until then.

The family, who own a 38% stake in the company, have given Davis more time to turn the group around. So far, his supply-chain modernisation plans have stumbled and have hit sales. Underlying like-for-like sales fell 0.2% in the 16 weeks to 11 October and Davis has predicted that sales will remain flat until April.

Davis’ planned accession to chairman in March 2004 would also fall foul of corporate governance recommendations in the combined code.

According to the code, chief executives should not become chairmen, or should explain why, as such a move leaves incoming chief executives with little scope to challenge the old order.

Meanwhile, competitors are storming ahead with Tesco and Wm Morrison Supermarkets revealing underlying sales growth of 6.3% and 9%.

And Asda recently knocked Sainsbury from the UK number two position in terms of size.

Henk Potts, an analyst at Barclays Private Clients, said Sainsbury is still suffering the ill-effects of underinvestment.

‘The modernised and re-formatted stores have started to do better, but in the meantime, competitors have been diversifying into big growth areas, such as clothing, electrical goods and home furnishings,’ he said.

‘Recent sales were absolutely dreadful, so they are in a position of losing market share with very little opportunity to expand.’

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