On first appearances, the high street chemist Boots and supermarket J Sainsbury do not have much in common. After all, one specialises in health and beauty, the other in food. But in recent years, as the retail market has undergone some radical changes, the two have come to share one particularly unenviable characteristic - they have fallen from grace.
Both retailers issue second-quarter trading updates this Friday and no one is expecting anything spectacular. The warm weather over the past summer will have helped, and analysts predict Boots' sales figures will be "quite reasonable". Yet concerns about margin remain, and Sainsbury's is likely to confirm it is continuing to lose market share to its rivals. It's a far cry from the days when the two companies were top of their game.
"Both enjoyed decades of market dominance," says Richard Hyman, chairman of the retail research group Verdict. "They were widely regarded as setting the standards of excellence by which their peers judged their own performances. But that just isn't true for either of them any more."
Earlier this year, Sainsbury's was able to report that full-year turnover had risen from £17.15bn to £17.43bn while operating profits were up at £739m against £665m. Yet at Tesco, until recently Sainsbury's closest rival, turnover jumped from £23.65bn to £26.34bn while operating profits came in at a hefty £1.48bn against £1.32bn.
Besides their disappointing performances, the groups have a connection though their so far failed attempts to join forces. While a project to put Boots franchises in Sainsbury's stores proved unsuccessful, it has been an open secret in the City for some time now that Sainsbury's chief executive, Sir Peter Davis, is keen on a full merger. Boots so far has refused to play ball, however, and speculation abounds that both retailers could separately find themselves at the wrong end of a bid. But, for the moment, they are having to put their houses in order on their own.
At Sainsbury's, things used to be simple - it was on top of the pile and everyone else struggled to keep up. But a power shift took place over the last decade as rivals shook up their acts. The biggest change has been the introduction of non-food items, an area Tesco excels in, with goods as varied as drugs and barbecues. The George range of clothes sold in branches of Asda, now Tesco's main rival, has proved so popular that the brand has opened two dedicated high street stores of its own. Neither have the big supermarkets left their food products to languish; they can offer customers both good quality at competitive prices (the forte of the Wm Morrison chain) and sophisticated, dinner party-inspired ranges such as Tesco's Finest.
Unfortunately, Sainsbury's was nowhere to be seen in this retail revolution, and it had already been knocked off the top spot by the time it did start to adapt. Initially the changes helped stop the rot. They included the Taste the Difference range and the endorsement of the Naked Chef, Jamie Oliver, as well as improved technology, price cuts and special offers. Most of this was introduced under Sir Peter, the former Prudential boss who took over in 2000. But three years on, many believe the impetus he brought with him is fading and that Sainsbury's has yet to address core issues. Recent research by analysts at Taylor Nelson Sofres has shown that Asda, owned by the giant American retailer, Wal-Mart, has overtaken Sainsbury's in UK market share terms, pushing it into third place.
"Sainsbury's problem is that it is still not as customer driven as it should be," says Mr Hyman. "Historically, retailers were always buyer driven - in other words, the buying department was king. But that's arse about face. You should be selling what your customers want you to sell, and of the major food retailers, Sainsbury's has taken the longest to shift to more outward-facing ideas."
At the heart of it, Sainsbury's appears confused about what it is: should it compete on price, quality or range? At the moment, the feeling in the City is that it is trying to muddle through in all three areas, which is not sending shoppers a clear message. Even its recent introduction of non-food wares comes incredibly late; the concept is no longer setting analysts alight.
This identity crisis is a problem Boots knows only too well. The chemist chain, which like Sainsbury's traces its roots back to the mid-19th century, decided in the late 1980s to diversify, and acquired a whole range of different businesses when it bought the Ward White retail conglomerate.
It proceeded to sell them off over the next 12 years and focus instead on selling an increasingly bewildering range of products. Paintings, records, kitchenware and even dog food have all graced the shelves of Boots at some time or another. Never one to keep things simple, under its previous chief executive, Steve Russell, Boots expanded with the introduction of the Wellbeing concept, which included chiropody, a holiday vaccination service and aromatherapy. The aim was to try to compete with the growing dominance of the supermarkets but the move was another failure; many of its offerings have now been dropped.
So the group, and new chief executive Richard Baker, who recently joined from Asda, are once more back at a crossroads, with the perennial "What will Boots be today?" question yet again looming large.
Boots tried to address the question once and for all earlier this year, bringing in the consultants McKinsey. Several key initiatives are understood to have been recommended. Some, such as the closure of Wellbeing, have already been carried out, while others, such as the sale of Boots Healthcare International (BHI), owner of Nurofen, Clearasil and Strepsils, and a slim-down of the 1,400-strong store portfolio, are still possibilities. Whether Mr Baker will follow McKinsey's advice is a matter of speculation for the City. Certainly he will have his own ideas but he still needs time to get to know the company, and no one is expecting any firm decisions to be made until the new year.
In the meantime, Mr Baker has to keep both sales and margin strong in an increasingly tough market. Boots incurred the City's displeasure earlier this year after a revealing an improvement in sales - underlying figures came in above forecasts at 7.5 per cent over last Christmas. However, it was forced to admit that this had been due to special offers and that the margin had suffered as a result. Not much point having stunning sales if profits are not able to keep up.
Simon Proctor, at broker Charles Stanley, says: "Boots is in a market where the supermarkets are gaining market share. What is going to happen about the deregulation of pharmacies is still up in the air but we an assume there's going to be greater competition. So while Richard Baker is highly regarded, he's got his work cut out."
Likewise, whoever steps into Sir Peter's shoes at Sainsbury's will have a tough job, though for slightly different reasons. Sir Peter is being promoted to chairman next year and the search is currently on for his replacement. But there is a concern that Sir Peter will not make life easy for the new chief executive. Sainsbury's may be keen to break with tradition and appoint an outsider, as Boots has done, but as one analyst warns: "If there's going to be a change, then there should be a change, [or] it doesn't give the new guy a chance to pursue his own ideas. You might as well have just got Sir Peter another deputy chief executive."
This problem makes finding someone to take on the role particularly difficult but eventually a replacement will be chosen and another person with have another go at redirecting Sainsbury's future, as Mr Baker is currently starting to do at Boots. Of the retailers, most are confident Britain's leading chain of chemists will, eventually, turn the corner. However, for Sainsbury's, the recent rescue plan may prove to be too little too late, particular with Morrisons close to securing the Safeway chain. One analyst is unequivocal and has a stark warning for whoever takes over from Sir Peter: "Sainsbury's is going to carry on sliding down the rankings and within three years it will be fourth unless it does something radical." And should that happen, Sainsbury's could become the new Safeway - and find itself with a new owner.Reuse content