Overtaken by Asda and with its Somerfield hopes dashed, what are the options now for Sainsbury? Elaine Watson reports

Plot the market share of Asda and Sainsbury on a graph since 1999 and it doesn’t take a genius to work out that their paths were going to cross sooner rather than later, says TNS Superpanel communications director Ed Garner. “It was never a question of if, but when Asda would move into second place.”

Nevertheless, discovering that it has slipped still further down the pecking order in the supermarket league table must have added insult to injury for Sainsbury.

The news came just hours after it heard its attempt to gain approval for any future - and at this stage hypothetical - acquisition of 171 Somerfield stores had been referred to the Competition Commission.

And even though the figure made public this week relates to the four weeks to July 20, it isn’t a blip in the data. “This is the shape of things to come,” says Garner. “If you look at the 12-weekly data, Asda is just 0.1% behind[16.5% to Sainsbury’s 16.6%], and the trends are long term. This has been on the cards for a long time.”

With the verdict in the Safeway auction looming, Sainsbury also faces the prospect of slipping further down the rankings should rival supermarket chains be given the green light by the Competition Commission to buy all or part of the Safeway estate.

Sainsbury now has a number of options, say analysts. It can pin its hopes on non-food, where Asda appears to be making most of the headway, and hope its recent drive on fresh food and better customer service pays dividends at the checkouts. Or it can engage in a more fundamental rethink of its brand and asset base.

The dilemma facing management was spelled out at a meeting with analysts last Thursday, says one of those present.

“Sir Peter as good as told us he needs to change the store portfolio to fit the brand, or change the brand to fit the portfolio,” the analyst adds.

The first option involves Sainsbury no longer trying to be all things to all men and instead refining its asset base so that its store portfolio is better aligned with its more upmarket brand. This might be achieved through some Competition Commission-sanctioned asset swapping - selling off big stores in the north and picking up as many Somerfield and Safeway stores in the south as regulators would allow, claim analysts.

If retreating to fortress south-east is not an option - and this week’s referral of its plan to buy the Somerfield c-stores if they ever came onto the market doesn’t bode well - then analysts believe Sainsbury will need to engage in a fundamental brand rethink.

But quite what that may entail is not clear. “We fully appreciate their predicament,” says another analyst who was also present at the meeting. “They tried to rough up the brand a bit, with the Savacentres and so on, but they didn’t do it with a deal of conviction.”

Ditching Jamie Oliver and trying to out Wal-Mart Wal-Mart would also be a recipe for disaster because it would merely alienate a large tranche of Sainsbury’s foodie customer base.

But some City commentators are less critical, and suggest Sainsbury is already doing the right things (revamping the supply chain, putting in more non food), and just needs to get the execution right. “They are doing exactly what they should be doing,” argues one. “If the TNS data makes any difference to the share price, the world’s gone mad,” says one supporter.

The good news for Sainsbury is that, despite the recent turmoil, its share price is up 7% over the past month (see p12).

And when it comes to this week’s news, the chain is putting on a brave face.

Head of media Pip Wood says the analysts’ meeting involved “an open and frank exchange of views”, but she says there are no plans to hoist ‘for sale’ signs over the stores in the north and move down south. Any discussion about asset swapping is “purely hypothetical,” she adds.

Similarly, while it may be “appropriate to look at the brand further down the line,” Sainsbury’s immediate priority is reinvigorating its supply chain, IT systems and stores.

Wood adds: “Without wishing to sound complacent, there is nothing fundamentally wrong with the food business, and we are putting in the non food this autumn. This has been a really big year for us and we will reap the benefits.”
A fundamental rethink needed?