King goes back to basics to complete the recovery

With a little help from Jamie, Justin King has turned Sainsbury's around. James Thompson explains how

In the spring of 2004, J Sainsbury had a trolley-full of problems which were all too visible for the dwindling and irate customers in its stores. The grocer's shelves were often empty, partly because of a botched IT outsourcing contract, and the food that was available was too expensive. While Sainsbury's' development team had been asleep for much of the 1990s and early naughties, Tesco had been on a land grab mission and had started to eat Sainsbury's' lunch and, for that matter, its ready meals, fruit and vegetables too.

Skip forward five years and Sainsbury's is a completely different beast. Yesterday, a far more muscular grocer boasted underlying pre-tax profits up by 11.3 per cent to £543m for the year to 21 March, on total sales, including VAT, up by 5.7 per cent to £20.4bn. In the five years since Justin King took the helm in March 2004, Sainsbury's has added 4 million customers, bringing the total number of shoppers currently gracing its aisles to 18 million. David McCarthy, the consumer analyst at Hobart Capital Markets, says: "He has done a much better job than most people in the trade thought he would." Yesterday, Sainsbury's posted annual like-for-like sales, excluding fuel, of 4.5 per cent, enabling it to boast of four consecutive years of like-for-like sales growth.

After Mr King joined the grocer, Sainsbury's conducted a huge customer survey and the response from customers was not complimentary. Mr King says its customer brethren were so "angry" that 250,000 bothered to respond and they vented their spleen about how Sainsbury's had let its standards drop on issues, including availability, price and customer service.

Tough decisions had to be taken. Among these, Mr King took the axe to its bloated head office staff, cutting about 25 per cent in the first phase of his tenure, although more than 200 jobs were also cut early this year.

Mr King was also bold on price, investing about £450m in his first four years to get it in shape to fight back against Tesco and its other rivals. Jonathan Pritchard, an analyst at Oriel Securities, says: "He has realised that sales growth is key and he has put the drivers in place to find that sales growth and hats off to him for that." The debate still rages about whether Mr King has truly achieved his plan of "Making Sainsbury's Great Again", which he introduced in 2004. The dwindling doubters cite Sainsbury's' pre-tax profits still being below the £610m Mr King inherited in 2004. But his defenders cite the plethora of significant problems when he arrived at Sainsbury's and say a direct comparison with 2004 is unfair. Sainsbury's posted pre-tax profits down to £466m in 2008-09 from £479m a year ago, affected by £77m of exceptionals including a drop in the value of its property portfolio. Over the year, Sainsbury's grew its underlying operating margin to 3.26 per cent from 3 per cent. More recently, Mr King has blunted the pencils of City scribblers who forecast that the grocer would suffer more than its rivals during the credit crunch, as customers traded down to rivals. Mr King says: "Our price perception has moved forward strongly over the past 12 months. Customers have found that our prices are a lot sharper than they remembered." In fact, Sainsbury's delivered sales growth of 8.1 per cent for the 12 weeks to 20 April, compared with Asda's 8 per cent, Morrisons' 7.4 per cent and Tesco's 4.6 per cent, according to TNS Worldpanel.

During the credit crunch, Sainsbury's has taken the fight to its rivals with sharper promotions and pricing, along with a successful campaign, Switch and Save, launched in September 2008, to persuade customers to switch away from more expensive branded products and buy its own-label goods. The Sainsbury's basics range, comprising 650 products, has delivered the most explosive growth, with sales up 60 per cent in the final quarter. Jamie Oliver, the celebrity chef, has been a mainstay of its advertising campaigns since 2000.

Yesterday, Mr King vowed to accelerate its space growth this financial year to 5 per cent, including extensions and new stores. For the year to March 2010, the grocer will open 50 of its smaller Sainsbury's Local convenience stores but this will double to 100 in 2010/11.

Sainsbury's is gunning not only to extend its store estate, but also to ramp up sales in areas, including its grocery home shopping and non-food in stores and online, where its business is still dwarfed by Tesco. Sainsbury's will launch a substantially augmented non-food offer online and in stores this year – which is likely to include a combined catalogue and internet offer, possibly called Sainsbury's Direct. A typically ebullient Mr King says: "We've got the greatest growth potential of any grocery retailer." A growing army of City analyst think its growth is sustainable. Mr McCarthy says: "I do think it is sustainable because most people underestimate the impact of momentum on a business and how difficult it is to get it. When like-for-like sales grow, you get the benefit of operational gearing."

There are a few potential obstacles that could knock its momentum. Sainsbury's yesterday said that its inflation was close to 3 per cent. But Mr McCarthy thinks that a potential risk for Sainsbury's and the other grocers is deflation, "particularly if we do not get any trading up". He added: "Food retailers have benefited from high inflation, which they have been able to hide because they have added trading down as a deflationary element." Furthermore, Sainsbury's may be at risk of a wounded Tesco launching a fierce fightback on price. But, for now, Mr King and staff at Sainsbury's, which turns 140 this year, should raise a glass of Champagne, maybe own-label, to a job well done over the past five years.

Good things come... King's payday

Justin King, the chief executive of Sainsbury's, is set to pocket a total remuneration package of about £5m this year. The pay bonanza includes his basic salary, bonus and a number of share incentive schemes, of which one is the Making Sainsbury's Great Again plan introduced in 2004. Yesterday, Mr King pointed out that this year's bonus element of his package will come from the annual pot of £60m, which 120,000 of its staff will share.

Speculation has been swirling for some time that Mr King could leave to take the chief executive role at M&S once Sir Stuart Rose leaves, which will be no later than July 2011.

But Mr King said: "I'm really proud of the part I've played here at Sainsbury's over the past five years, but the most exciting part lies ahead and I want to be playing my part." He added: "The next five years will be incredibly exciting and I can't see myself anywhere other than heading that growth story." But Jonathan Pritchard, the Oriel Securities analyst, said: "The Sainsbury train could be derailed by a resurgent Tesco or having its management team poached."