King review will plunge Sainsbury's into losses

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The Independent Online

J Sainsbury will be forced into a full-year loss after chief executive Justin King unveils a writedown of up to £500m to cover mistakes made by his predecessor, Sir Peter Davis.

The recently installed boss will reveal on Tuesday the full extent of problems with the £3bn distribution system brought in by Sir Peter. Mr King will also announce up to 1,000 job cuts and the sale of the group's former head office in south London for around £30m. The retailer is understood to be in advanced negotiations with Beetham Organization, a private property company based in Liverpool. Mr King has rejected calls to move out of the new head office in central London.

The distribution system was designed by US software firm Retek and then outsourced to consultants Accenture, but has been beset by problems. However, because of the way the contract is structured, Sainsbury's has little redress, it is understood. Insiders believe it could take at least a year to iron out all the problems with the system.

Analysts are expected to welcome the writedown, with most only expressing disappointment that it is not higher.

However, the move will push Sainsbury's into a full-year loss. Forecasts have already been slashed after the group warned that higher costs and sliding sales would dent interim profits, also due out on Tuesday.

Pre-tax interim profits are likely to be between £125m and £135m, while the most recent analysts' forecasts for final pre-tax profits range from £280m to around £340m.

Said one retail analyst: "Everyone expects him to do a profit warning anyway and by writing off more, you obviously reduce the depreciation charges over the following years."

As well as the writedown, Mr King is expected to unveil between 800 and 1,000 head office job cuts.

Other costs to be clawed back include the closure of up to 15 stores. The £300m dividend is also set to be halved.

However, the main focus of Mr King's turnaround strategy will be on improving operational performance. Mr King is understood to be keen to avoid the example of Sir Peter, who focused on improving profits and cutting costs at the expense of sales and market share.

Mr King wants to restore Sainsbury's reputation as a purveyor of high-quality foods, although he will continue to trim prices. He began cutting prices shortly after joining the company from Marks & Spencer in March, and they are now closer to those at value rivals Tesco and Asda.

He will also scale back Sainsbury's non-food offering as part of the refocus on high-quality food retailing. The group entered the market late and was then hit by severe overstocking problems. However, its recently introduced clothing range, Tu, is likely to stay.