Don't ask Jamie Oliver if you need a recipe to save a supermarket

Sainsbury's fate rests not in the hands of a mockney TV chef but with Justin King, its new chief executive. As he unveils his rescue plan, Abigail Townsend and Clayton Hirst ask how the ex-market leader has come so close to checking out

As Justin King girds himself today for a particularly stressful week, part of him must be wondering what on earth he has taken on.

On Tuesday, the new chief executive of J Sainsbury will unveil his strategy for turning the group around. As legacies go, King's is a tough one. The once number-one supermarket chain has warned that interim profits will come in between just £125m and £135m, while sales and market share continue to drift. It is in its current mess for two main reasons: complacency and a botched attempt to right things by King's predecessor, Sir Peter Davis.

As strategies go, Sir Peter's was standard stuff. Over three years, he wanted to cut costs, up profits and invest £3bn modernising the supply chain. Most of this money was lavished on a new distribution system, developed by US software firm Retek and installed by consultants from Accenture. But the system has been beset by problems. Supermarkets aim to have goods available 95 per cent of the time: it's the industry benchmark. But Sainsbury's availability, say sources, has fallen for some key items to just above 80 per cent.

To make matters worse, Sir Peter ripped out the old system and replaced it wholesale with a new one. Tesco, for example, is using the Retek system, but only in some of its stores. Most retailers also mix automated and manual procedures to try to keep mistakes at a minimum.

And where IT is outsourced, retailers will usually cede only 50 per cent, to retain control. Sainsbury's outsourced 100 per cent to Accenture.

Mr King is understood to have told allies that just £100m of the £3bn investment made any real impact. But like Sir Peter's contract, the deal is watertight. So although the system is roundly blamed for the shelves being bare, Sainsbury's has little redress against its suppliers.

Sir Peter also stripped out costs - around £700m worth; but while profits rose, sales continued to soften. Promotions were increased, television chef Jamie Oliver was drafted in as the chain's public face, but despite Sir Peter's claims that the cheeky mockney had won over customers, the marketing push proved to have little real impact. Sainsbury's market share has fallen from 17.1 per cent in 2002, to 16.6 per cent in 2003 and to just 15.7 per cent this year, according to market research firm TNS-Superpanel.

One industry insider, who has worked for one of Sainsbury's biggest rivals, sums it up: "You no longer trust the retailer to deliver, and have to waste 45 minutes going somewhere else to get the one other thing you're after. Sainsbury's customers are traditionally middle class, cash rich, time poor and the worst people to annoy."

But while Sir Peter's reputation may be easily muddied, not all of Sainsbury's woes can be laid at his feet. In the past decade, around £7.6bn has been invested in the business, but profits before interest and tax have almost halved.

The reason, most believe, is that Sainsbury's took its eye off the ball. It ignored the competition, and changing customer demands, at its peril. One-stop shopping, non-food and competitive pricing were what people wanted. Yet Sainsbury's failed to react.

Says Jonathan Pitkanen, a retail analyst at credit agency Fitch: "Sainsbury's is in an awful position. It has got a loyal customer base but it's no longer enough." At this stage, he is not convinced the chain can be saved.

Mr King evidently believes it can be, however, and is looking to do what his predecessor didn't - boost sales. The main thrust will be cutting prices, a process Mr King started shortly after he joined in March. He was prompted by his wife, who described the supermarket's prices as "bonkers", and by a perception that while Sainsbury's charged at the top end, the quality of its products had fallen woefully behind that of its rivals.

According to The Grocer magazine, a weekly basket of groceries from Sainsbury's fell from £46.58 to £41.94 during September. That pulls it towards territory dominated by Asda and Tesco (both have average weekly baskets of between £40 and £41) and away from the top end, where Waitrose averages baskets of around £50. Prices are expected to continue falling.

But the balancing act is a tough one. Sainsbury's does not have the range or economies of scale to compete with Asda or Tesco, and most agree the upscale market, dominated by Waitrose and Marks & Spencer, Mr King's old company, is too narrow to support a third entrant.

Mr King therefore has the unenviable task of carving a third way for Sainsbury's, of keeping it suspended in the middle, as it currently is, but without the dire trading.

He will also scale back non-food, although the clothes range Tu is to stay. Sainsbury's offer is unwieldy and has suffered severe overstocking. Mr King has argued that the retail estate is too diverse to offer a consistent range. He believes non-food is a distraction, and that Sainsbury's should be rebuilding its reputation as a purveyor of high quality groceries.

None of this will have any impact, however, if the distribution is not addressed. Morgan Stanley retail analyst Ben Britz comments: "At the heart of Justin King's operating review has to be his plans to fix the supply chain, both depots and IT. We doubt this will be difficult to fix, just potentially expensive." Industry sources believe it could take as long as a year to iron out all the problems and get stock availability back to the magic 95 per cent.

It will also cost money, so Mr King is not going to pass up the opportunity to cut costs to help pay for it. It is understood that a property sale and leaseback have been ruled out, but the dividend to shareholders is likely to be cut, saving around £150m from the £300m cost. Up to 15 stores will be closed and nearly 1,000 head office jobs will go.

As with everything Mr King does, however, a compromise will have to be reached. Morale is reportedly already low, and job cuts could darken the mood.

Letting punters know what is happening is also vital, and the industry expects much from the Christmas advertising campaign. (Though, as one retail expert snorts: "I don't think he'll have the balls to drop Jamie Oliver - he's too tied into the brand now.")

For the time being, Mr King has the support of the City and the Sainsbury family, which owns a 35 per cent stake in the retailer. But one dodgy Christmas or yet more damage to the share price, and that situation could quickly change.

A takeover has been mooted, but at this stage, it remains unlikely. As a director of a leading venture capital firm says: "The reason people are looking at Sainsbury's is because of the underlying property portfolio. You would buy the business, spin off the property for value and then you're left with a much smaller operating business. But at the end of the day, you have got to be very convinced that there is value in what you end up with."

In the meantime, Mr King has to get on with the task in hand. His reputation is on the line - and some are sceptical he's the man for the job. But he's all Sainsbury's has. "With cost savings, you know the company can produce them, any company can," says Rupert Trotter, a retail analyst at shareholder Isis. "What we really want to hear is how Sainsbury's can improve operational executions. It's about three things: quality, price and availability, and that's what it has got to get right. It's a great challenge and there's everything to play for."

Another industry source puts it even more succinctly: "Quite simply, he cannot afford not to succeed."