Sainsbury's to cut costs by £600m

J Sainsbury, the UK's second-biggest supermarket group, yesterday promised to cut its cost base by up to £600m a year within three years and hinted that it could announce the sale of its Homebase DIY unit within weeks.

J Sainsbury, the UK's second-biggest supermarket group, yesterday promised to cut its cost base by up to £600m a year within three years and hinted that it could announce the sale of its Homebase DIY unit within weeks.

At the time of its full-year results in May, Sainsbury's said its top priority was to improve the performance of its core supermarket business. In a progress report to the City yesterday, the group detailed a cost-cutting programme to help increase efficiencies and bring the company's margins in line with those of its leading competitors. The changes will mean ploughing an extra £150m to £200m a year into capital expenditure between now and 2003, when the full benefits will flow through.

The company's more immediate aim was "to stabilise group profits this year" before e-commerce, exceptional items and tax. Sainsbury's shares closed up 7 per cent at 379p.

Sir Peter Davis, Sainsbury's chief executive, said the margin improvements would result from a complete overhaul of the group's IT systems, which have been outsourced to Andersen Consulting, from updating the company's depot network and improving or expanding existing stores.

Sainsbury's margins currently stand at about 4 per cent, trailing both Tesco, at around 5.9 per cent, and William Morrison, the most efficient player at 6.2 per cent. Of the total £600m of projected cost savings, half are expected to come from improved internal efficiencies, while the remainder will be achieved through buying goods at a better price.

Commenting on the strategic review of Homebase, which is expected to lead to a disposal of the division, Roger Matthews, finance director, said the process is "likely to take a few more weeks to complete". Duke Street Capital, the venture capital firm, is tipped as the most likely buyer of the assets.

Paul Smiddy, at Crédit Lyonnais, said: "There are lots of changes taking place.... But most of the joy will come a few years down the line... I would not expect many forecasts to be changed on the back of this." Another analyst said: "The strategy is all very well in isolation. But can this be achieved if Tesco and others are turning the screw at the same time?"

Sir Peter, the former "Man from the Pru" who was appointed in January to replace the ousted Dino Adriano, admitted: "It is a constant running battle.... The target will move if there is a price war, if the market changes or if the competition changes." Sir Peter also outlined plans to re-establish Sainsbury's as "the UK's first choice for food shopping". He said the strategy was not to be the biggest but to attract affluent, yet value-seeking, shoppers by offering "extraordinary quality at ordinary prices".