Sales at Sainsbury, once Britain’s proudest supermarket, are flatlining. There are signs that chief executive Justin King is breathing new life into the business. But is he applying the right treatment to restart its pulse? The City gives its prognosis
Justin King must be wondering this weekend whether he really can turn things around at Sainsbury. He’s not the only one, following the struggling supermarket’s announcement of a pre-tax loss of £39m - the company’s first loss in its 135-year history.
But while analysts and industry commentators agree that a quick-acting antidote does not exist, investors and the media continue to demand a short-term fix. Hence, the company finds itself both the target of buy-out rumours linking it to various private equity houses and continued questioning of the effectiveness of the changes the chief executive is making.
A month after he delivered a business review outlining a “new sales-led profit recovery” strategy that pretty much threw out everything that Sir Peter Davis had instigated, talk of the company being circled by predators continues.
Despite this week’s poor results, the supermarket’s shares have risen strongly on speculation that former Asda boss Allan Leighton is considering mounting a bid. Archie Norman is another name to have been linked with various potential buyers of Sainsbury.
The latest rumour is that the dealmaker George Magan has looked at a possible offer. But, as yet, no private equity house has put its name in the frame - probably because such is the size of the target that it would require a consortium to take it private. The other fly in the ointment for a buyer is the Sainsbury family, whose hold on the business (through their sizeable stake) remains, despite them having no operational input.
King insisted on Wednesday: “We are clear on the actions we need to take to make Sainsbury’s great again.” But regardless of whether the company remains publicly listed or falls into private hands, its problems are not going to be sorted out overnight. We asked leading analysts whether they think King is the man for the job or if the company should be sold - and if so, to whom?
Clive Black
Head of research, Shore Capital
“It is under better control now and Justin King has put forward some common-sense proposals. It is not a quick fix and investors must be patient, but in the quoted arena there is a pressure they could do without. King must increase like-for-like sales, margin and cashflows and he’s got some nasty competitors. There are remedial things that he’s doing but I think it will take 15 months before we can judge him. But even if there are big improvements, is Sainsbury’s a long-term growth story? The jury remains circumspect.”
Mike Dennis
Analyst, Cheuvreux
“If is was just money that was needed to buy Sainsbury, then it would not be that difficult. The absolute barrier to entry is the Sainsbury family. It’s about how emotionally attached they are to something that they are not operationally involved in. It’s been going down and they’ve not touched it in 10 years - they are the most irrational investors. At Littlewoods, it took the family a decade to give up the ghost so I hope at Sainsbury we don’t have to wait another 10 years. Surely if Jessica and Sebastian and the other Sainsburys are that interested, why are they not working in it?”
Peter Macielinski
Advisor to Duke Street Capital & former managing director of Geest
“I think Allan Leighton is super but it would be wrong to think that he is the only person that could sort out Sainsbury’s problems. One of the biggest dangers is to go to the same names. It helps to have experience but the main things you need are wisdom and determination. New blood and new thinking are good. But the City just regurgitates the same mantras for the same people, forgetting the big names were once small. Sir Peter Davis had lots of experience - and at Sainsbury - and he failed!”
Paul Smiddy
Analyst, Baird
“It will take a long haul back, as it took a long haul to get it to where it is today. If management gets the execution right, then the rest will follow - it’s not rocket science. It needs to get the supply chain working again. Everything King has said so far sounds sensible - compared with his predecessors. It will be a struggle, but it is saveable.”
Mike Godliman
Director, Pragma Consulting
“While its competitors have become weekly destination stores, Sainsbury has looked like a niche player. With its higher prices, it has looked more like a Waitrose than a Tesco. Justin King is trying to get a greater share of wallet and will probably achieve it, but it will take a long time as he’s got a hell of a lot to do on store management. But if he can create a Sainsbury with a better food offer - and with value prices on basic core items - we will see the weekly shoppers return. However, it will still be weak on non-food because it hasn’t got the space in stores and has never cracked this part of its business. Shoppers expect to spend some of their non-food money at the supermarket rather than on the high street.”
Robert Clark
Research director, Retail Knowledge Bank
“The management says it will take two to three years, but the City is not that patient and it will take more time than this to turn it around, so arguably it would be better in private hands because private equity houses work to a three to five-year timeframe. But it will never take over Tesco in the foreseeable future. Justin King has to sort out store revamps, bed down a new management structure, reinvest in availability because it is now worse than when Sir Peter Davis took over, and reduce numbers at head office. It’s got serious problems on all fronts and I believe Sainsbury is worse off in relative terms than Boots and Marks & Spencer. It’s clearly not going to go bust as this is a company that can still make profits, but it will have a major task to make a comeback. Its one saving factor might be that Morrisons will have problems turning around Safeway in the south - Sainsbury’s heartland.”
Pieter Totte
Chairman of Real Good Food Company and advisor to numerous food manufacturers
“I’d very much like to see it become a well-organised machine as it would be good to have another strong player again in the market. From a manufacturing point of view, we hate companies in turmoil because you have a situation that you can’t control. You need to understand what they require, but if the people change then the philosophy changes and it can be a disaster. It has strong visions for the future but in the short term should try to re-build true partnerships with suppliers. The new man is a good guy and what he has said is very encouraging.”
Richard Ratner
Head of research, Seymour Pierce
“Nobody from outside the company will buy it. Although I think every man and his dog will look at it, nothing is going to happen. We were very anti-Sir Peter Davis and think Justin King has hit the nail on the head with his strategy, but the business is highly geared with £2bn of debt and he can’t do what he wants with the property. So in my view the shares are overvalued.”
Sanjay Vidyarthi
Analyst, Teather & Greenwood
“We are sellers of the stock on valuation terms but we’re relatively positive on the new strategy - compared with Morrisons. Sainsbury is more likely to succeed if it can improve availability and get its customer base to spend more. Although its sales have been on a treacherous slope, its customer numbers have not changed, whereas Morrisons will have to steal customers from Tesco and Asda. It’s had problems with availability but Justin King has said some of the new systems are so sophisticated they plan and predict on weather and holidays, etc. And he is to give some authority back to the store managers. I’m not sure if there is anybody out there to buy the company because it’s struggling against the world’s most aggressive retailers and even on King’s figures, it won’t be cash-generative until 2007.”
Penny Jarvis
Director, Egremont
“It still has a tremendous customer loyalty and amazing goodwill as a legacy brand. It has to get some basics right such as availability and better clarity of range. The management can’t feel good about writing off all that investment in new systems, but it is far better to swallow hard and move on. It has already started to put more people in the stores but this will not improve customer service unless they are trained and have the right attitude. Its problems are all addressable and it can have a good go at making things better. But Tesco and Asda are now in a place that Sainsbury cannot play in anymore.”
Justin King must be wondering this weekend whether he really can turn things around at Sainsbury. He’s not the only one, following the struggling supermarket’s announcement of a pre-tax loss of £39m - the company’s first loss in its 135-year history.
But while analysts and industry commentators agree that a quick-acting antidote does not exist, investors and the media continue to demand a short-term fix. Hence, the company finds itself both the target of buy-out rumours linking it to various private equity houses and continued questioning of the effectiveness of the changes the chief executive is making.
A month after he delivered a business review outlining a “new sales-led profit recovery” strategy that pretty much threw out everything that Sir Peter Davis had instigated, talk of the company being circled by predators continues.
Despite this week’s poor results, the supermarket’s shares have risen strongly on speculation that former Asda boss Allan Leighton is considering mounting a bid. Archie Norman is another name to have been linked with various potential buyers of Sainsbury.
The latest rumour is that the dealmaker George Magan has looked at a possible offer. But, as yet, no private equity house has put its name in the frame - probably because such is the size of the target that it would require a consortium to take it private. The other fly in the ointment for a buyer is the Sainsbury family, whose hold on the business (through their sizeable stake) remains, despite them having no operational input.
King insisted on Wednesday: “We are clear on the actions we need to take to make Sainsbury’s great again.” But regardless of whether the company remains publicly listed or falls into private hands, its problems are not going to be sorted out overnight. We asked leading analysts whether they think King is the man for the job or if the company should be sold - and if so, to whom?
Clive Black
Head of research, Shore Capital
“It is under better control now and Justin King has put forward some common-sense proposals. It is not a quick fix and investors must be patient, but in the quoted arena there is a pressure they could do without. King must increase like-for-like sales, margin and cashflows and he’s got some nasty competitors. There are remedial things that he’s doing but I think it will take 15 months before we can judge him. But even if there are big improvements, is Sainsbury’s a long-term growth story? The jury remains circumspect.”
Mike Dennis
Analyst, Cheuvreux
“If is was just money that was needed to buy Sainsbury, then it would not be that difficult. The absolute barrier to entry is the Sainsbury family. It’s about how emotionally attached they are to something that they are not operationally involved in. It’s been going down and they’ve not touched it in 10 years - they are the most irrational investors. At Littlewoods, it took the family a decade to give up the ghost so I hope at Sainsbury we don’t have to wait another 10 years. Surely if Jessica and Sebastian and the other Sainsburys are that interested, why are they not working in it?”
Peter Macielinski
Advisor to Duke Street Capital & former managing director of Geest
“I think Allan Leighton is super but it would be wrong to think that he is the only person that could sort out Sainsbury’s problems. One of the biggest dangers is to go to the same names. It helps to have experience but the main things you need are wisdom and determination. New blood and new thinking are good. But the City just regurgitates the same mantras for the same people, forgetting the big names were once small. Sir Peter Davis had lots of experience - and at Sainsbury - and he failed!”
Paul Smiddy
Analyst, Baird
“It will take a long haul back, as it took a long haul to get it to where it is today. If management gets the execution right, then the rest will follow - it’s not rocket science. It needs to get the supply chain working again. Everything King has said so far sounds sensible - compared with his predecessors. It will be a struggle, but it is saveable.”
Mike Godliman
Director, Pragma Consulting
“While its competitors have become weekly destination stores, Sainsbury has looked like a niche player. With its higher prices, it has looked more like a Waitrose than a Tesco. Justin King is trying to get a greater share of wallet and will probably achieve it, but it will take a long time as he’s got a hell of a lot to do on store management. But if he can create a Sainsbury with a better food offer - and with value prices on basic core items - we will see the weekly shoppers return. However, it will still be weak on non-food because it hasn’t got the space in stores and has never cracked this part of its business. Shoppers expect to spend some of their non-food money at the supermarket rather than on the high street.”
Robert Clark
Research director, Retail Knowledge Bank
“The management says it will take two to three years, but the City is not that patient and it will take more time than this to turn it around, so arguably it would be better in private hands because private equity houses work to a three to five-year timeframe. But it will never take over Tesco in the foreseeable future. Justin King has to sort out store revamps, bed down a new management structure, reinvest in availability because it is now worse than when Sir Peter Davis took over, and reduce numbers at head office. It’s got serious problems on all fronts and I believe Sainsbury is worse off in relative terms than Boots and Marks & Spencer. It’s clearly not going to go bust as this is a company that can still make profits, but it will have a major task to make a comeback. Its one saving factor might be that Morrisons will have problems turning around Safeway in the south - Sainsbury’s heartland.”
Pieter Totte
Chairman of Real Good Food Company and advisor to numerous food manufacturers
“I’d very much like to see it become a well-organised machine as it would be good to have another strong player again in the market. From a manufacturing point of view, we hate companies in turmoil because you have a situation that you can’t control. You need to understand what they require, but if the people change then the philosophy changes and it can be a disaster. It has strong visions for the future but in the short term should try to re-build true partnerships with suppliers. The new man is a good guy and what he has said is very encouraging.”
Richard Ratner
Head of research, Seymour Pierce
“Nobody from outside the company will buy it. Although I think every man and his dog will look at it, nothing is going to happen. We were very anti-Sir Peter Davis and think Justin King has hit the nail on the head with his strategy, but the business is highly geared with £2bn of debt and he can’t do what he wants with the property. So in my view the shares are overvalued.”
Sanjay Vidyarthi
Analyst, Teather & Greenwood
“We are sellers of the stock on valuation terms but we’re relatively positive on the new strategy - compared with Morrisons. Sainsbury is more likely to succeed if it can improve availability and get its customer base to spend more. Although its sales have been on a treacherous slope, its customer numbers have not changed, whereas Morrisons will have to steal customers from Tesco and Asda. It’s had problems with availability but Justin King has said some of the new systems are so sophisticated they plan and predict on weather and holidays, etc. And he is to give some authority back to the store managers. I’m not sure if there is anybody out there to buy the company because it’s struggling against the world’s most aggressive retailers and even on King’s figures, it won’t be cash-generative until 2007.”
Penny Jarvis
Director, Egremont
“It still has a tremendous customer loyalty and amazing goodwill as a legacy brand. It has to get some basics right such as availability and better clarity of range. The management can’t feel good about writing off all that investment in new systems, but it is far better to swallow hard and move on. It has already started to put more people in the stores but this will not improve customer service unless they are trained and have the right attitude. Its problems are all addressable and it can have a good go at making things better. But Tesco and Asda are now in a place that Sainsbury cannot play in anymore.”
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