Davis quits as Sainsbury warns on profits

- Last updated on GMT

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

J Sainsbury, Britain's third largest supermarket group, has warned
that pre-tax profits are likely to be below forecasts this year as
the company slashed its margins to compete with lower-priced
rivals. The warning, coming at the start of a year which Sainsbury
had confidently predicted would see an upturn in its fortunes, has
finally cost embattled chairman Sir Peter Davis his job.

Davis' departure, a year ahead of schedule, had been predicted for some time, not least because of alleged clashes of style with the company's new chief executive, Justin King. Former M&S man King faces a tough task to turn around the fortunes of Britain's erstwhile market leader, and the continued presence of Davis, whose sweeping restructuring of the business was the main reason for the company's flagging performance, was always going to make that task hard.

But it was Davis' bonus package which finally proved decisive. The former chairman was awarded a one-off bonus £2.4 million for 2003, despite the fact that Sainsbury saw both declining sales and profits as it struggled to compete with price-driven rivals such as Tesco, Asda and Morrisons.

This proved to be the final straw for Sainsbury's shareholders, already disgruntled by the company's poor performance and the fiasco over the failed appointment of Sir Ian Prosser as chairman (Prosser's track record at brewer Bass was less than spectacular and shareholders felt he was a poor choice to steer the retailer out of trouble), and Davis has now been replaced by Philip Hampton, former finance director of Lloyds TSB, BT Group and BG Group.

But Davis' departure will hardly make things easier for the new management team of King and Hampton. Already losing ground to both Tesco and Asda as a result of disruptions to stores during its restructuring, the takeover of Safeway by Morrisons earlier this year has added an additional pressure: low prices.

Morrisons is widely seen as the best purveyor of every day low process (EDLP) in the UK, and Tesco and Asda have both reacted rapidly to the rolling out of this strategy to the acquired Safeway stores, making Yorkshire-focused Morrisons a nationwide threat for the first time.

Sainsbury, too, has been obliged to lower its prices in order to compete, and it is the impact of these price reductions which will reduce profits this year. The warning came, ironically, as Sainsbury announced a slight recovery in its performance in the first quarter - growth was 1.9 per cent in the first 12 weeks of 2004/05, compared to 0.8 per cent in the final quarter of fiscal 2003. Like-for-like sales were ahead 1 per cent, a modest increase but nonetheless better than the 0.9 per cent drop in the fourth quarter.

The company's trading statement also reflected the ongoing difficulties which will remain long after Davis' departure. "We are implementing a number of specific measures to improve on-shelf availability in our stores, including the deferral of a planned depot closure and operating with higher than average wastage levels,"​ the statement read, an oblique reference to the company's persistent failure to get even the basics right - after all, what good is a supermarket which consistently fails to have enough on its shelves to meet customer demand?

The much vaunted launch of a huge range of non-food goods last year - one of the pillars of Davis' strategy for the group - also appears to have been less than successful. "We are aggressively trading out of our over stocked position in non-food goods,"​ the company admitted - suggesting that it would have done better to give more shelf space to food brands which its shoppers clearly wanted.

Related topics: Market Trends

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