Sainsbury’s fingers in many pies

Given that the UK’s third-largest supermarket has increased its like-for-like sales over the past 13 quarters, it would be a huge surprise if chief executive Justin King did not deliver the goods again. However, the grocer’s sales growth could be lower than its big three rivals, judging by recent market data.

For the 12 weeks to January 27, Sainsbury’s sales rose 5 per cent, Tesco’s were up 5.4 per cent, Asda’s climbed 6.2 per cent and Morrisons’ jumped a soaring 11.3 per cent, according to TNS Worldpanel.

However, Sainsbury’s faces strategic issues beyond a potential marginal slowdown in its like-for-likes. A key issue – which fits into the damned if you do, damned if you don’t category – is Sainsbury’s plans to massively increase its non-food offer in stores. Some in the industry feel Sainsbury’s could alienate customers and dilute the power of its brand – which is built on fresh-food credentials – by moving heavily into non-food, but others feel that Tesco and Asda will leave Sainsbury’s for dust if it does not ramp its non-food offer soon.

Sainsbury’s wants to increase its sales by£3.5 billion by 2011 – a third of which will come from non-food, which will account for half of new space. Given that Sainsbury’s stores tend to be much smaller than Tesco and Asda’s, the impact on its footfall, sales per square foot and margin will be closely scrutinised by the City’s number crunchers over the next year.

With food, another issue is that Sainsbury’s has not yet slayed the availability beast that has dogged it for several years. Speculation concerning availability issues has not yet fed through into Sainsbury’s trading figures, but it’s fair to say that store operations are not being helped by the present three-month sabbatical of retail director Ken McMeikan.

In addition to McMeikan’s absence, a source close to Sainsbury’s says the grocer is concerned that there could be a minor exodus among its 1,000 most senior managers in the summer, when they will be able to redeem half of their long-term incentive plan – as long as Sainsbury’s hits full-year targets to the end of March. In particular, Sainsbury’s is thought to be worried about store managers heading for the beaches or casinos.

While these are concerns to Sainsbury’s and investors, it appears unlikely that they will have to contend with another takeover bid from Qatari-backed investment fund Delta Two in the second half of the year. However, if Delta Two decides to sell down its 25 per cent stake, a private equity firm may find Sainsbury’s with a share price well below£4 attractive again – although this is unlikely, given the lending market.

Irrespective of any potential bids, chief executive Justin King may find the second half of 2008 much more lively than the first.