Sainsbury's offloads US arm as domestic troubles continue

- Last updated on GMT

Related tags: Sainsbury, Tesco, Asda, Sainsbury's

Struggling British food retailer Sainsbury's has given itself a
£225 million shot in the arm with the sale of its US unit Shaw's to
the Albertsons chain. Despite good performances from Shaw's in
recent years - better, in fact, than its domestic business -
Sainsbury's needs to focus its efforts on the UK, where it where it
predicts a decline in profits for 2003, writes Chris Jones.

Albertsons will pay $2.5 billion for Shaw's, leaving Sainsbury's with an exceptional post tax profit of £225 million - money which is likely to come in handy as the British number three expects another tough year of trading in the UK, where the competition from Tesco, Asda and now Morrisons is likely to become even more intense.

Some £680 million of the sale proceeds will be returned to shareholders, while the remaining cash will be reinvested in the UK business. Around half the money will be used to acquire a further 20 stores from three unnamed retailers - although this could include both Safeway and Morrisons, both obliged to sell stores as part of their merger deal, and arch rival Tesco, which is selling around 33 stores to raise further cash for expansion.

Sainsbury's said it would also continue to expand into the UK convenience sector - where the regulators have been generous in allowing the major multiples room to grow in recent months - as well as seek other investment opportunities.

While the cash from the Shaw's sale will certainly be helpful, Sainsbury's will still have to convince analysts that it has a viable strategy for investing the money. The company-wide restructuring over the last few years has seen Sainsbury's customers desert it in droves, and the convenience store acquisition programme smacks of a 'me-too' mentality (following Tesco) rather than a cohesive plan to generate growth from an under-exploited sector.

The trading statement issued today alongside the announcement of the Shaw's sale reflects the ongoing struggles Sainsbury's is facing. With the likes of Tesco and Morrisons both posting double-digit increases in like-for-like sales for 2003, Sainsbury's 0.2 per cent decline looks worryingly poor, and with the restructuring programme (which has been the main reason for declining sales) continuing until the summer, things are likely to get worse before they get better.

Trading conditions this year are likely to get worse still, with Morrisons' Every Day Low Prices policy being rolled out at the traditionally more expensive Safeway chain and prompting price cuts from rival chains. Sainsbury's said it had already seen its margins reduced as a result of these competitive pressures, and predicted that profits for 2003/04 would fall below last year's level of £695 million as a result.

Sir Peter Davis, outgoing chief executive who will next week take over as chairman of the company, put his now traditional positive spin on the figures - despite apparent disagreement with chief executive elect Justin King, who wanted a more downbeat message as he took over at the helm.

"It's been a tough year for Sainsbury's but we have made real progress both in the business transformation plan and in delivering cost savings,"​ Davis said. "We have previously indicated that when our modernisation programme is behind us we will be in a position to invest more in price and quality in order to drive sales growth. We will also begin to get the financial benefits of a modernised supply chain and new IT platforms."

With the restructuring expected to be completed in the summer, the time will soon come when Sir Peter will have to live up to these promises, but there are already signs that a number of the newer Sainsbury's ventures are beginning to bear fruit. The home delivery service, Sainsbury's to You, is likely to break even by the year end, while the non-food range, introduced last year, continues to show encouraging early sales.

But getting its core food retail business back on track will be the real test of Sainsbury's ability to cut it in an increasingly competitive market, especially one which has become much more price orientated, traditionally not Sainsbury's strongest area.

Only time will tell whether Sir Peter has left Justin King with a poison chalice or a star performer, and the former M&S man will still have much to do before Sainsbury's can even think about challenging for the number one spot it held for such a long time.

Related topics: Market Trends

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