Sainsbury warns of risk in price-cut campaign: One retail giant says promotion could hit margins as another speeds up worldwide store development

J SAINSBURY, Britain's biggest food retailer, sent further tremors through the retailing and food manufacturing sectors when it warned that its price-cutting campaign could hit margins.

The company also said it would continue to respond to pressure from competitors.

Sainsbury's shares fell 15p to 385p, a low for the year, as City analysts downgraded their forecasts to take account of the impact of the Essential for Essentials campaign, launched on Sunday, which has cut the price of 300 products. Argyll, owner of Safeway, was also a big casualty, falling 18p to 274p, while Tesco dropped 4.5p to 195p.

David Sainsbury, chairman, said the group would concentrate on promoting the quality and value of its own brands. He ruled out launching a range of cheaper own- brand products, as Tesco has done.

Mr Sainsbury denied that the group was being hit by competition from discount chains such as Kwik Save and Aldi, and said that price- cutting by other rivals like Asda and Tesco - both of which are promoting themselves on low prices - had not had a noticeable impact.

The current price promotion 'will be a long-term campaign, more than something we will do for a six-month period', Mr Sainsbury said. 'It is a question of reinforcing our traditional values.'

While the campaign would hit gross margins, the impact on profits would depend on how successful it was in increasing sales, he said. Sainsbury also hoped to save costs with improved technology.

The group indicated that it expected its suppliers to share some of the costs of promotion. 'I am sure our suppliers will react to the additional volume, as they always have in the past,' Tom Vyner, deputy chairman and joint managing director, said.

The comment sparked a fall in food manufacturing shares. Unilever, the margarine-to-detergents giant, fell 23p to pounds 11.45. Northern Foods, which supplies milk and convenience foods, shed 3p to 229p.

Sainsbury disclosed that its pre- tax profits in the 28 weeks to 25 September rose by 11 per cent to pounds 434m on sales up a similar percentage to pounds 5.9bn. Earnings rose 9 per cent to 16.34p a share, and the interim dividend was increased from 2.7p to 3p.

The Sainsbury supermarket chain achieved a 13.3 per cent rise in operating profits to pounds 391.1m, while sales were 8.9 per cent ahead at pounds 4.7bn. But the sales increase was largely due to new space, while existing stores rose by just 1.8 per cent.

Mr Sainsbury said that, in stores that had not been affected by a new Sainsbury opening nearby, like-for- like growth averaged 3 per cent.

The other three businesses - Savacentre and Homebase in Britain and Shaws in the US - increased profits by more than 17 per cent. The star performer was Homebase, with a 31.6 per cent rise in profits to pounds 11.9m and a 9 per cent sales increase.

Mr Sainsbury said that an increasing proportion of the group's capital expenditure - likely to be about pounds 790m this year - would go on these three businesses. Sainsbury has increased its estimate of the number of Savacentre stores - which sell clothes as well as food - that it can open from 15 to between 20 and 25. It currently has 10.

The group opened 13 Sainsbury stores in the first half and a further 10 are planned for the second half.

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