Sainsbury's image takes another knock

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Sainsbury's already tarnished reputation took another serious knock
this week when the company bowed to shareholder pressure and
decided not to appoint its preferred candidate to the post of
chairman designate.

Britain's number three supermarket group announced last week that former Bass head Sir Ian Prosser was to replace Sir Peter Davis as chairman when the latter retires next year.

But the announcement was greeted with shock by Sainsbury shareholders and investors who had hoped for someone more dynamic to lead the company into what is likely to be one of the most challenging periods in its history. Prosser spent 34 years at Bass and InterContinental Hotels, the leisure arm which was all that remained after the brewing business was sold to Interbrew, and was widely regarded as a safe - if uninspired - appointment.

It was the reaction of a number of institutional shareholders which prompted Sainsbury to reconsider the appointment, although it said that it was Prosser himself who had decided not take up his new position.

So the chain is now faced with the daunting prospect of having to find a new chairman before the end of March, when its new chief executive, Justin King, takes up his position. Sainsbury had pledged to have a replacement for Davis in place by that time, so that the next generation of management could get immediately down to work.

Action needed soon

King's arrival cannot come too soon for many observers, increasingly frustrated at the lack of direction at the erstwhile UK market leader. A three-year restructuring programme - which has seen the company revamp almost all its stores, launch a major non-food product range and streamline a number of its other operations - has had an adverse impact on Sainsbury's performance, and the group has fallen even further behind market leader Tesco.

In fact, Sainsbury is now the number three food retailer in Britain after Asda moved into the number two spot last year, and with the merged Morrisons/Safeway group likely to be snapping at its heels from next month, Sainsbury needs to do something to convince observers that it has a business plan worth following.

At the moment, the company's strategy seems to be focused almost entirely on turning itself into a clone of Tesco rather than opting for its own style as Asda and Morrisons have done.

Of course, copying the style of the market leader is a strategy adopted by companies across the board, but for it to be successful, the copier has to be able to at least match, and preferably better, the company it is copying. Ironically, this is what Tesco did when Sainsbury was the number one, elevating itself into the top spot as a result, but whether Sainsbury is capable of doing the same thing remains to be seen, not least because Tesco is already so good at doing what it does it is hard to find a way to better it.

No logic to convenience store move?

Sainsbury's latest acquisition is a prime example of the company's 'catch up' mentality. Just weeks after Tesco continued its rapid drive into the convenience store sector in the UK by adding the London-based Adminstore group to the T&S operations in bought in 2003, Sainsbury this week said it was buying Bells Stores, a chain of 54 upmarket convenience stores based in the north east of England.

The convenience store sector in the UK is valued at around £21.5 billion, according to Sainsbury, and the company is keen to increase its share of that - at present, it operates 66 Sainsbury's Local stores and 15 petrol station forecourt stores in association with Shell, with plans to extend the latter to a further 100 Shell stations.

Sainsbury will have a total of 220 convenience stores once the Bell acquisition and Shell roll out have been completed, but this still makes it a minor player in this sector. Tesco will have around 600 outlets under its own Express fascia as well as those owned by T&S and Adminstore, and is almost certain to expand more rapidly in this sector as it is sitting on a cash pile of around £1.6 billion for expansion, while other players such as Co-op, Londis and Costcutter have much larger store portfolios and considerably more experience in this arena than Sainsbury.

Admittedly, the 54 Bells stores will continue to be run by the current management team, at least ensuring a smooth transition, but questions are likely to be raised about Sainsbury's persistence in moving into a new segment of the retail market at a time when its core supermarket business is still far from running perfectly.

To a certain extent, Sainsbury's hand has been forced by Tesco's aggressive push into the convenience sector, but long-term benefits will only be achieved if the company can replace this reactive strategy with one which is more forward looking.

Sainsbury's acquisition strategy has already been brought into question by its bid for Safeway - a move which would have undoubtedly moved it up the rankings but also given it even more stores to refit at a time when its customers were already turning away in their droves, fed up with the constantly shifting layouts at many Sainsbury stores - and while a move into the convenience arena is strategically more intelligent, the timing, and the management's ability to cope with yet more changes, is likely to lead to a few more raised eyebrows.

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