Sainsbury still has a mountain to climb

Sir George Bull took the helm at UK supermarket group Sainsbury​ five years ago when the company was in something of a downward spiral. Five years later, the latest first quarter trading statement from the group saw Sir George in bullish mood - although the figures still leave plenty of room for improvement.

For many years Sainsbury was the undisputed leader of the UK supermarket sector, but the group was shaken out of its complacency when it was overtaken by Tesco in the mid 1990s. Customer numbers began to drop, profits began to shrink, and the late 1990s saw the group issue two consecutive profit warnings.

Bull's task was to revamp the company's antiquated image, revamping not only the stores but also the chronically underfunded infrastructure. Sainsbury had effectively failed to move with the times, and its task over the last five years has been to drag itself back into the contention in the increasingly competitive supermarket sector.

That this is still a work in progress is clear from the company's latest trading statement, issued earlier today. First quarter sales at the UK supermarket group were up just 2 per cent, including petrol sales, with like-for-like sales ahead just 0.3 per cent. Tesco's first quarter figures, announced in June, showed a 15 per cent increase in group sales and a 5.8 per cent rise in like-for-like turnover.

Bull, who will retire in March next year, told shareholders at the company's AGM today that there was clearly still much work to be done. "We are currently some two thirds of the way through the restructuring programme and we are achieving traction,"​ he said. "There is still much to be driven through to a successful conclusion but progress is being made and the board is confident that the benefits from the programme will increase in pace during the next 18 months."​

He continued: "There are inevitably concerns that the full benefits of the transformation programme are not yet evident. I believe that these concerns should be seen within the context of the last financial year when we delivered double digit growth of 10.8 per cent in underlying group operating profits. As a consequence of the changes we are implementing, Sainsbury's is in a fundamentally much stronger position than it was five years ago."​

Not exactly a ringing endorsement of the company - given the state it was in five years ago - but a clear reflection of the scope of the task facing the UK's number two supermarket group. With the gap between itself and arch rival Tesco widening every quarter - and with Asda snapping at its heels in third place - the company will have to show some major improvement if it is to maintain its position - and fight off potential takeover bids as the retail pack becomes increasingly ravenous.

Safeway bid illogical?​

Sainsbury is not the only food retailer to have struggled while Tesco and Asda have advanced. Safeway, Somerfield, Iceland and Marks & Spencer have all had a torrid time over the last five years, and have shown differing levels of recovery.

M&S is now in an increasingly strong position and Somerfield has revamped its business sufficiently to fight off two hostile takeover bids in the last few months - including one from Sainsbury itself. Iceland is still struggling to compete with the major players and its position looks increasingly precarious, while Safeway had gone some way towards turning its business around before it became the focus of a major takeover tussle between all the major UK retailers.

Sainsbury is one of the company's bidding for Safeway, but the logic of its bid is increasingly difficult to fathom. The company has spent a large amount of money on revamping its own business yet by its own admission it still has several years to go before it meets its targets. With Safeway's stores in an even more precarious position, the investment cost for Sainsbury would be enormous, with no guarantee of a significant upturn in sales for several years.

Focusing on putting its own house in order is therefore likely to be Sainsbury's prime motivator in the next few years. It is rare for company heads to do anything but talk up their firm's performance, so when Sainsbury's chief executive Sir Peter Davis says that he is "not satisfied by the sales performance during the last two quarters"​ it is a clear sign that the situation is far from good.

Essentially, Sainsbury has mismanaged its restructuring - a move very much in keeping with its performance over the last decade. As Davis himself said, the changes to the group's stores and its supply chain have had a major impact on its customer offering - the one thing that every retailer has to ensure remains at a consistently high level.

But there are positive signs, Davis stressed, with improved service standards and a wider range of fresh foods both being well received. Not much to show for two years' investment, perhaps, but a step in the right direction.

"The next 12 months are most important in the delivery of our change programme, when the first two years of groundwork and capital investment really take hold. We will then have a leaner, fitter business in better shape to compete in the UK's dynamic food retailing sector,"​ Davis said.

But the UK food retailing market is likely to have changed beyond recognition in the next 12 months, and Sainsbury could still face an uphill struggle to keep pace.

Even its international investments are conservative, with its sole overseas unit, Shaw's in the US, reporting sales growth of just 1.1 per cent in the first quarter. The US is hardly the most dynamic supermarket sector - in fact, many groups are struggling there at the moment because of low consumer confidence - and certainly compared to Tesco's rapid expansion in eastern Europe and Asia, Sainsbury looks decidedly lacklustre.

So plenty of work still to be done for the UK number two, which finally needs to start delivering on its promises.