No quick fixes in store for Sainsbury's

J Sainsbury reinforced its image as industry laggard yesterday with disappointing third-quarter sales figures that laid bare the chasm that exists between the former darling of the British housewife and rivals such as Tesco.

The supermarket chain, which was overtaken by Asda as the country's number two last year, admitted that underlying UK sales had barely risen during the closing stages of one of the best years for food retailers in recent memory.

Not even the company's silver-tongued chief executive, Sir Peter Davis, could talk up its lacklustre 0.1 per cent rise in like-for-like sales in the three months to 3 January. His protestations that the group's underlying 2 per cent gain over the four-week Christmas period represented "progress" fell on deaf ears and Sainsbury's shares slid 8.5p to 294p.

Analysts were largely unimpressed. "Sainsbury's isn't going anywhere. The numbers pale into insignificance compared with Wm Morrison's [10.2 per cent increase] and what Tesco will deliver," said Tim Attenborough at BNP Paribas. Another analyst added: "Relative to the rest of the competition Christmas was still poor."

For Sir Peter, 2004 should be his big year. The Sainsbury's stalwart (he first worked for the family-controlled company 27 years ago) is due to relinquish the hot seat at the end of March, four years after he took the job. From his somewhat cooler chairman's vantage, Sir Peter had hoped to sit back and soak up the plaudits for sorting out the mess he inherited back in March 2000.

But with the company still stuck in a strategic quagmire, bogged down by its own intractability on pricing, Sir Peter will instead be crossing his fingers and praying hard that there is still room in shoppers' hearts for this most British of retailers.

Often derided by its customers as arrogant, overpriced and offering an unpleasant shopping experience, Sainsbury's has all to play for over the next year if it is to regain the ground lost during Sir Peter's tenure as chief executive.

All eyes will be on Justin King, the 42-year-old former head of Marks & Spencer's food division, who steps into Sir Peter's shoes on 29 March. The City has hailed the Allen Leighton/Archie Norman protégé as Sainsbury's saviour in much the same vein that it greeted Sir Peter's appointment as chief executive. But has it overestimated what he can achieve?

One analyst warned yesterday: "The difference he [Mr King] can make will certainly be limited in the short term because he is still struggling against a culture that isn't as dynamic as it needs to be in this kind of industry." That, in a nutshell, explains how Sainsbury's has slipped since 1995 from the country's favourite supermarket chain to its number three.

To his credit, Sir Peter has made massive inroads into shaking up the business he inherited. He has spent some £2bn on overhauling the company's infrastructure and making some long-overdue investments in the stores, stock and distribution systems. These include seven new depots and a new IT system that actually registers when shelves have run low of certain items - something of a novelty for Sainsbury's, which once managed to go a full four weeks before noticing one of its stores had run out of Woolite, a detergent for hand-washing jumpers.

Its new "store-friendly deliveries", broadly a bespoke aisle service so that goods for certain aisles are stacked together, should mean that products actually make it on to the shop floor, rather than being left to fester out the back, as apparently used to happen.

All these initiatives are estimated to have saved the company some £710m by the end of its current financial year, with a further £250m to follow next year. Small consolation, however, for investors who are still wincing at the company's deteriorating sales trend. Its performance over the past three months was even less impressive than predicted and there is worse is to come.

Solace over Christmas was achieved only by putting the massive restructuring programme on hold; now that it has been cranked back into life, expect sales to slip, was Sir Peter's frank message yesterday. The three-year transformation drive has already been extended by three months, which means Sainsbury's sales will struggle to recover before the summer at the earliest.

Naturally Sir Peter is supremely confident about the group's future. "I'll be delighted to prove people wrong," he retorted when asked about the scepticism towards his group.

Dismissing the sales lag that saw Sainsbury's market share slip to 16.1 per cent from 17.2 per cent, according to the latest TNS data, as "a bit of ground to make up", he added: "I'm optimistic that we will get back into positive sales territory on the sales front." Nevertheless, he declined to set a target. "I'm not promising to commit hara-kiri if I don't get there," he chortled.

There are no quick fixes, but the City was heartened by Sir Peter's recent volte-face on Sainsbury's pricing policy. Forced to concede that not everyone considered the group's upmarket food offering good value for money, the confessed foodie has promised to invest cost savings in lower prices. "I'm being a bit coy about our plans because we have still got five or six months to go ... but you will see us lowering our prices," he said.

The main question plaguing analysts is whether Sainsbury's can do enough to cope with the fresh competitive onslaught that 2004 has in store, what with the emergence of a fourth major force in food retailing. Morrison's acquisition of Safeway means there will be three players focused on everyday low pricing: Tesco, Asda and Morrison's.

Here Mr King will have to draw upon every ounce of his Asda heritage if he is to make a difference. And here, analysts believe, lies the potential for some interesting dynamics between the chief executive and his chairman. Sir Peter denied yesterday that it would be a bitter pill for him to swallow if Mr King's arrival heralded an overhaul of his own strategies. "He [Mr King] agrees with the broad shape of what we want to do. I would be very surprised if he felt that he had changed his mind about our plans [while on gardening leave]," Sir Peter said.

As well as unveiling a new pricing scheme, many analysts believe Mr King may rethink the group's policy on payouts. Much to the delight of the founding family, which still controls 35 per cent of the stock, Sainsbury's is renowned for its generous dividends; the problem of late is that it has been using debt to fund them. "If Mr King wants to get more realistic, it would be quite an easy move to cut the payout," one analyst said.

If this happens it might not only be Sainsbury's customers who lose faith in its brand values. Without the family's support the company is vulnerable to a takeover bid. The Competition Commission's conclusions on Safeway - that the UK consumer needs four big supermarkets to choose from - may have ruled out a bid from an industry rival, but plenty of others are likely to be interested.