Sainsbury’s going back to its roots

Sainsbury’s CEO, Justin King, has had to employ hard measures to turn around the company’s supply chain problems. There are, however, other aspects of modern supermarket retailing that Sainsbury’s seriously needs to address. These include non-food sales and the necessity of keeping prices competitive with the market leaders Tesco and Asda. King believes that going back to the company’s roots with quality fresh food at value prices is the way forward. After all, Sainsbury’s still has a large number of loyal customers, it is in a relatively strong position in addressing the ‘convenience’ trend and has an advantage over discounters because it can also offer a premium range of private label products. But will King have enough time to prove his point as acquisition rumours continue.
Elsevier Food International Vol.8, No.2 May 2005
Steve Foster

These last few years have been difficult ones for J. Sainsbury, the one-time leading supermarket in the UK. But things are beginning to look a bit brighter for Sainsbury’s. The back-to-basics strategy of Justin King, the company’s new CEO, who took office in the spring of 2004, has refocused and reinvigorated the Sainsbury’s retail offer in the short term. However, there are still a number of key issues to be addressed and answered in the long term.

These have hardly been the glory, glory years for J Sainsbury, the one-time leading supermarket in the UK. Overtaken as market leader by Tesco in the 1990s, it has now lost the number two spot to Asda Wal-Mart, and is even under pressure from Morrisons, which has increased share due to its acquisition of Safeway UK in 2004.
The former retail icon's woes over the past ten years or so have been laid at the boardroom doors of the Sainsbury family, which still hold over 30 per cent of company stock, and laid at the feet of senior executives and management. The company was seen variously to be slow moving, somewhat arrogant, and reactive rather than proactive.
Issues that affected the performance of the company included a step too far in international retailing ambitions principally with the acquisition of the Shaw's supermarket chain in the northeast corner of the United States. The Shaw's chain was acquired by Albertsons in 2004 as Sainsbury's withdrew from international retailing to concentrate on its core UK operations. This is a company that has gone from going global back to its roots by going local.
Some sizeable gaffes were made by Sainsbury's in the 1990s. When Tesco launched its Clubcard loyalty card programme in 1995 it was dismissed as "electronic Green Shield stamps" by Lord Sainsbury. Sainsbury's was subsequently forced to launch its own Reward Card scheme in the same year.

Back to basics
Sainsbury's has been playing catch-up when it should have been the leader. The loss of market leadership in the UK must have had a psychologically damaging effect on company morale. Rumours of acquisitive bids for the company can hardly have helped much either. Add to that a collapse of Sainsbury's newfangled supply chain, which led to widespread lack of on-shelf availability, the cardinal sin of retailing, was particularly apparent in 2004.
It was therefore a difficult time, to say the least, for Justin King, the company's new CEO, who took office in the spring of 2004. However, there are signs that King and his board may have turned the corner and that there are signs of green shoot recovery. Far from complicating issues King, a former Asda and Marks & Spencer man, has gone back to basics in an attempt to get back to Sainsbury's original strengths: retailing in the UK with a clear and uncomplicated range of formats, and a simple message to consumers: quality fresh food at value prices.
In the fourth quarter trading statement for 12 weeks to 26 March 2005, total sales were up 7.2 per cent (5.4 per cent excluding petrol). Like-for-like sales, Easter adjusted, for quarter four were up 3.7 per cent (1.7 per cent excluding petrol).
King commented on these results: "We are pleased with the quarter four sales numbers, which continue to show an improved trend. We recovered well from the Christmas and New Year peak trading period and had solid trading over the seasonal events."
One or two sets of quarterly results are only signs rather than proof of recovery, but a trend of forward momentum is emerging.
According to Rhys Williams, senior analyst at investment brokers Seymour Pierce, it is looking a bit brighter at Sainsbury's. However, he says for Sainsbury's to drive continuous improvement in retail performance it is imperative that "it keeps price competitive with Tesco and Asda - not on all lines - but certainly on the top 100 best-selling lines. It does not have to stay in front necessarily, but at least within touching distance."

Supply chain problems
Williams points out that Sainsbury's has had to employ hard measures to turn around its supply chain problems. The company has increased the number of people working in the supply chain and reduced levels of automative processes "to get it working again." However, at some stage this balance will need to be reversed, he says.
Neil Mason, retail analyst at Mintel, says that one of the fundamental challenges for Sainsbury's and Justin King over the last year has indeed been to address problems with its supply chain which led to non-availability of products on shelf. This was a particular problem in 2004 and at the peak Christmas trading period Sainsbury's had to revert to manual procedures. Sainsbury's has also employed an additional 3,000 store staff to ensure on-shelf availability in the stores. At the same time 750 jobs are going at head office.
Justin King inherited the supply chain problem from the previous CEO Sir Peter Davis who had introduced a business transformation programme. "The system failed to deliver and was maybe too ambitious," Mason says. Mason points out that Sainsbury's contracted out IT and logistics and that perhaps the company might try to regain more first-hand control.

Growth opportunities
Mason emphasises that Sainsbury's has had to address its internal challenges as a priority in addition to meeting the external challenges of Tesco and Asda. One area Sainsbury's will need to address seriously is non-food. Both Tesco and Asda have stolen a march on Sainsbury's. Mason says: "Non food features higher margin products, and is where the real growth is coming from."
Another area where growth is coming from in the UK is the convenience store sector. Sainsbury's is in a relatively strong position to address this trend. Mason says: "The balance is right. Sainsbury's has responded to the trend towards convenience."
The company already had its Local convenience store format and petrol forecourt sites, a number in partnership with Shell, before it acquired two leading multiple convenience store chains, Jacksons (acquired August 2004), a Yorkshire and north Midland-based chain, and Bells Stores (acquired February 2004), a northeast England-based chain. In November 2004, Sainsbury's also acquired HP Beaumont, a six-store chain in the East Midlands.
The simplification of its formats is also being felt at the other end of the square footage scale. Sainsbury's sold its Homebase DIY chain to GUS in 2002. The company is now rebadging its Savacentre hypermarket format as Sainsbury's. This should provide good opportunities for non-food development.
On the product offer Mason says: "It is going back to its roots with quality fresh food at value prices, because that's what they're good at." The trick will be to communicate to its customers that quality can also mean value. Around 6,000 price cuts were announced this year. On private label development; Sainsbury's launched the Basics range of economy lines in 2005. Mason points out that the Basics economy range could be a useful tool to compete with limited assortment discount chains operating in the UK including Aldi, Netto and Lidl.
Sainsbury's, like the other leading UK supermarket chains, has a two-pronged advantage over the discounters because it can also offer a premium range of private label products such as its Taste The Difference range and sub-private labels such as the Blue Parrott Café children's range. "UK consumers like to pick and mix," says Mason.

The Justin and Jamie Show
Communications to customers is of vital importance and at present things are beginning to look a bit like the Justin and Jamie show. Celebrity chef Jamie Oliver, the star of Sainsbury's television advertising campaigns, attracted mass media coverage and widespread applause for his 2005 programme "Jamie's School Dinners", which drew attention to the poor dietary content of food served in UK schools. The programme and subsequent campaign by Oliver led directly to new investment in school food programmes by the Tony Blair government. Such great publicity could rub-off on Sainsbury's.
Meanwhile Justin King has been conducting his own charm offensive in the media. For example this year King has been a guest on BBC Radio Five Live station answering phone-in questions from listeners.

Keeping it simple
According to a report by Mintel, King is taking complexity out of the business. The report says: "He is shifting the focus back onto the customers and sees - rightly in our view - that the long-term future of the business relies on driving the sales forward. So his aims are simple, to cut prices and make the business competitive again, improve stock availability and re-establish the image for quality and value for money that Sainsbury's used to have."
The Mintel report observes that King is looking for a sales-led recovery. Over the next three years his plans include: lifting revenues by £2.5 billion (£1.4 billion grocery, £700 million general merchandise and £400 million convenience); investing £400 million in price, quality and service; deliver £400 million of cost efficiencies. On the supply chain, Sainsbury's will look to renegotiate the deal with supply chain partner Accenture to give the company greater control over its own business.
The Mintel report says: "There is no reason why the new plan should not succeed, although execution will prove difficult given the competitive pressures from rivals Asda and Tesco. But in spite of everything, Sainsbury's still has a large number of loyal customers and a very large number of people who use it as a secondary shopping venue. Many of the latter could convert back to using the store for their primary shop. But it will all take time and the big risk for the company is that it will not be allowed that time. There are bid rumours around but the financial community is probably prepared to give Mr King the benefit of the doubt, though probably not for long."
It seems that the back-to-basics strategy of Justin King has refocused and reinvigorated the Sainsbury's retail offer in the short term. However, there are still a number of key issues to be addressed and answered in the long term, not least the continuing acquisition rumours and the role of the Sainsbury's family when it comes to talk of a takeover. By keeping it simple and going back to the company's roots King, supported by everyone else in the company, could emerge as Sainsbury's saviour.

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