J Sainsbury set for distribution write-offs

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The Independent Online

The new chief executive of J Sainsbury will attempt to convince the City ­ and the group's shrinking customer base ­ that he can solve the supermarket group's distribution crisis when he unveils the result of his business review next week.

Justin King, who succeeded Sir Peter Davis six months ago, is expected to write-off a significant proportion of the £3bn the group has spent on overhauling its distribution system over the past three years ­ to no avail. There could also be a cull at the supermarket's head office, with some commentators predicting up to 700 jobs could go to help pay for extra staff on the shop floor.

Analysts expect Mr King to adopt the same "kitchen sink" tactic used by Kate Swann, the chief executive of WH Smith, who reported losses of £135m last year after clocking up £200m in exceptional charges. This will mean admitting for the first time that Sir Peter destroyed shareholder value by wasting billions of pounds on state-of-the-art distribution centres and supply chains that have left Sainsbury's 460 stores with fewer items on their shelves than ever before.

Sainsbury's flagged the need for large write-downs last week when it issued its third profits warning since March and said that its guidance towards underlying pre-tax profits of £125m to £135m excluded any "costs or charges that may arise from the completion of the business review". The group will also slash its dividend, by as much as half to 7p per share, to conserve cash.

Although Mr King is expected to announce that he plans to focus on growing the company's top line, analysts and retail executives warn that unless he can fix the many broken links in the supply chain, any sales drive will backfire.

One supermarket industry insider said yesterday: "Availability is at the very heart of retail. If he can't get the products on the shelves, then there's no point in having any initiatives on products or quality. The question is not so much what's wrong with the supply chain, but how long can Sainsbury's hold it together when the situation on shelves is so serious, particularly with Christmas coming up?"

Sainsbury's has already slashed the price of hundreds of goods ­ taking a massive hit to its profits in the process. It warned that interim profits will fall by two-thirds. Goldman Sachs forecast full-year underlying profits of £317m, but said its prediction was "a shot in the dark" without knowing the outcome of the review.