Justin King, the chief executive of UK retailer Sainsbury’s, takes pride in being an optimist and, right now, he is that rare breed – an upbeat businessman. In five years at Sainsbury’s, King has breathed fresh life into the business, which has confounded claims it could suffer during the recession. Dean Best reports.
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Five years ago, Sainsbury’s, the UK grocer, was viewed as a retailer in trouble.
In May 2004, the company reported falling annual profits as it struggled against the likes of rivals Tesco and Asda.
Seven weeks earlier, ex-Marks and Spencer executive Justin King was named Sainsbury’s CEO and given the task of breathing fresh life into what had been the UK’s largest food retailer.
However, news of falling profits and the prospect of a fight with Tesco and Asda on price left City analysts cold.
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By GlobalData |
Sainsbury’s CEO Justin King |
“It’s hard at this stage to see any prospect of sustainable recovery,” said one. “I don’t see any quick fixes,” insisted another. The future for Sainsbury’s and King looked bleak.
Fast forward five years, and into the middle of the worst UK recession for almost 20 years, and Sainsbury’s looks not only fixed but also well-positioned to weather the downturn.
Indeed, you’d have to look pretty hard for signs of that the recession is hitting Sainsbury’s.
On Wednesday (25 March), the company booked some pretty impressive figures, with sales growth gaining pace during the last quarter of its fiscal year.
The numbers prompted praise from retail analysts. Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said Sainsbury’s had gauged the mood of UK consumers “extremely well”.
“It appears that customers’ current quest for value has played into Sainsbury’s hands at the expense of some of its higher priced peers,” Hunter said.
The performance also looked to have poured cold water on claims that Sainsbury’s status in the middle ground of the UK retail scene would hurt the company during the downturn. Sainsbury’s has enjoyed success with its “Switch and Save” campaign, which has promoted its own-label products against some of the branded lines in its stores.
A self-proclaimed optimist, King struck an upbeat tone at last week’s Retail Week Conference – some said too upbeat – but he clearly knew he had these numbers ready to pull out of his back pocket.
King has much to smile about. Sainsbury’s innovative marketing campaigns, including “Switch and Save” and “Feed Your Family For A Fiver” have proved a hit with more and more cash-strapped UK consumers in recent months.
While Wal-Mart’s Asda and Morrisons may be seeing sales rise faster than Sainsbury’s, King’s success in breathing fresh life in Sainsbury’s will not have gone unnoticed at Tesco, which has not enjoyed the same kind of like-for-like sales as its more upmarket competitor.
What’s more, Sainsbury’s own-label push could protect margins as it drives home its value message. On the face it, any focus on price could endanger margins but, at Sainsbury’s, margins could be protected by the success of its Basics own-label range, which generates better profits for the retailer than selling branded lines.
That said, some in the City view Tesco as a better long-term investment. Henk Potts, equity strategist at Barclays Wealth Management, believes Tesco’s better value offering and presence in international markets gave it the nod over Sainsbury’s.
“An awful lot of good news is already priced into Sainsbury’s share price,” Potts told financial website cantos.com. “There’s an element of the market that believes that Sainsbury’s will struggle to maintain that like-for-like sales growth throughout the rest of the year.”
Shore Capital’s Clive Black said he “broadly agreed” with Potts’s sentiments. “Sainsbury’s performance has well exceeded our expectations and, if you were looking at a more defensive stock, you would favour Sainsbury’s or Morrisons over Tesco,” Black told just-food.
“But, Tesco is positioned to enjoy more meaningful and diverse growth and its shares still trade at a material discount to Sainsbury’s.”
Ever the optimist, King is likely to take such sentiment with a pinch of salt. After all, five years ago, few predicted the recovery that has emerged at Sainsbury’s, which has proved that, for now at least, it is anything but stuck in the middle.
