Yoof appeal comes too late at Sainsbury's, the supermarket that was left on the shelf

A rigid, top-heavy structure and a complacent attitude have left the once all-powerful brand trailing its rivals in the trolley race. Heather Tomlinson asks if it can ever make a comeback

The supermarket superhighway has diverged into two lanes with an impenetrable barrier in between. In the fast lane, like souped-up MGs or Renault Clios, are Tesco, Asda and Wm Morrison. All are storming ahead, making large gains in market share and boosting sales through nippy little turns and adjustments in their pricing strategies and customer offers.

Then there is the inside lane, containing the old Ladas and the tractors, trundling along, giving rise to concern over their roadworthiness. Here can be found Safeway, Iceland, Somerfield and, increasingly, J Sainsbury. All have stalled sales growth or falling sales and cannot seem to find a gap in the barrier to allow them change lanes.

In that group, Sainsbury's is akin to an ageing Land Rover. It is large, has a long British heritage, and was traditionally used by toffs and other well-to-do types. However, these days it needs a lot of new parts, and keeping it ticking over is proving tricky and expensive. Similarly, in its bid for Safeway, Sainsbury's is losing ground to the more nippy offers from rivals Asda and Morrison's, not to mention the supercharged retail entrepreneur Philip Green. A successful bid for Safeway from a rival would make it still more difficult for Sainsbury's to switch between the two lanes, and the attitude of the competition regulators has made the odds against Sainsbury's itself winning the race rather long.

The retailer has been struggling to accelerate for some time. Ever since the early 1990s, when Tesco overtook it as the largest food retailer in the UK, Sainsbury's has found it difficult to gain momentum. Worryingly, it is about to be overtaken as Britain's second largest grocer by Asda, which is owned by US giant Wal-Mart.

Tesco, Asda and Morrisons are all merrily slashing their prices to attract the cost-conscious consumer, while building new supermarkets around the country. Meanwhile, the better-paid customers who once favoured Sainsbury's are heading in the direction of Marks & Spencer or Waitrose, and some are even happy to trade down.

"For many, many years, Tesco was the market leader in the blue-collar segment, while Sainsbury's was always market leader in the white-collar segment," says Richard Hyman, chairman of retail consultancy Verdict Research.

"In just 10 years, Tesco has succeeded in luring white-collar customers without alienating its blue-collar customer base, and it has done that very cleverly."

Asda, too, is getting in on the game, and is expanding its premium range, known as Extra Special, to compete with Tesco's Finest and Sainsbury's Taste the Difference, heating up the competition for the better-off consumer.

Industry experts say Sainsbury's woes were caused by a culture that was inward-looking and not customer focused, allowing smaller rivals to gain an advantage. "Sainsbury is disadvantaged by the fact that for decades, it was the benchmark model by which everyone else judged their own performance in food retailing," says Mr Hyman. "That engendered an inward-looking, self-satisfied culture and a structure that was rigid. People like Morrisons and Tesco always had to strive harder for crumbs of good performance that they could get off the table. Sainsbury's was very self-satisfied and believed what they did was right because it was what they did."

He argues that another problem is Sainsbury's previous lack of commitment to the sale of non-food products like clothes and CDs. The investment of Asda and Tesco's in this field has been so successful that they threaten chemists, electrical retailers and DIY stores with their vast ranges of goods.

To stop the rot, Sainsbury's chief executive, Sir Peter Davis, was brought in from the Prudential during 2000. He had worked at the company before, more than a decade ago, but he left because he did not think he would ever be offered the top job. On his return he was hailed as the saviour of Sainsbury's - the new blood destined to restore the fortunes of the group. It wasn't long before he announced radical changes both to the company's image and it infrastructure.

Jamie Oliver was brought in as the face of the chain. The Mockney chef proved a great success and Sainsbury's claims he has been responsible for more than £100m a year in increased profits.

Sir Peter also set about reforming the company's infrastructure. Its antiquated storage and distribution network was too slow in getting popular products on the shelves, and unable to compete with the modern systems of Tesco and Asda.

The same went for the chain's aged IT system, which could set only one price for a product nationwide. Managers would have to change prices manually if, for example, a store in a working-class areas had to make reductions to compete with a nearby Asda, or if an upmarket store found it was charging significantly less than Waitrose. Also needing to be updated were the tills and back-office functions throughout the chain, as well as refurbishments for some of the more tired-looking stores.

So far, Sir Peter has spent more than £2bn on these improvements, and the company is developing a new range of non-food products like home furnishings and clothes, to be introduced later this year.

But sales are still lacklustre. Analysts and shareholders are starting to ask whether Sir Peter's overhaul has been radical enough, and to place a question mark over his future.

Predictions for the forthcoming update at this week's annual general meeting are that like-for-like sales will be revealed as flat, at best; some analysts think they will be down by as much as 1.5 per cent. Although Sir Peter's cost-cutting programme has boosted profits by 17 per cent to £667m in the last financial year, it is the loss of market share and the poor sales performance that are causing concern among investors.

Analysts wonder why Sir Peter chose to move the company's more than 2,000 head office staff to an expensive site in Holborn, in the heart of London, particularly as some of those staff have been made redundant in recent months. The location contrasts sharply with the less exalted headquarters of Sainsbury's rivals. Morrisons is based in Bradford, Asda in Leeds, and Tesco in Cheshunt, Hertfordshire.

"I'm sure it's so they can be near the Royal Opera House," suggests one City analyst mischievously, hitting at Sir Peter's directorship of that institution. Sir Peter has been criticised by the City for being too involved in worthy deeds such as chairing the Government's Employer Task Force on Pensions and the Confederation for British Industry's committee on "rewards for failure".

But more fundamentally, analysts are questioning whether Sainsbury's can remain dominant in its sector by promoting a "quality and value" image, which means that its average shopping basket is more expensive than those of its main rivals. "Their cost base is still out of line with Asda and Tesco," explains Paul Smiddy at Robert W Baird. "In their quest to protect their profits, they are pushing upmarket products down the throats of consumers. Some customers would look at the range that has been skewed and think, 'Golly, this is an expensive store'."

A survey by Verdict Research showed that loyalty among Sainsbury's customers is relatively low. "They don't have their hearts and minds," says Richard Hull, head of UK retail at Cap Gemini Ernst & Young. "Tesco has got a core customer, not just in better locations but in terms of broader and longer loyalty than Sainsbury's."

The chain's top-heavy management structure and its old back-office systems are also preventing it from responding to changes in taste as quickly as its rivals. As Mr Hull says: "Most of its competitors can turn things around infinitely more quickly than Sainsbury's, where there is an atmosphere of bureaucracy." Sainsbury's acknowledges the problem, and points out that this is why it is investing heavily in its infrastructure.

Some observers believe that, given the enormity of the task Sir Peter was appointed to carry out, it is still too early to expect results.

"He has had a very difficult job to do," says Mr Hyman. "Given Sainsbury's traditional structure and culture, it was always going to be difficult to get into the fast lane of this market." But he adds: "I'm not sure there is anyone who could get them into it.

"One can identify what would be needed, but it requires change on such a massive scale that it's not very likely to happen. They need bigger stores, real authority, and to be credible in non-foods. To try to cram 20 years of investment into a short space of time - that's not easy to do."