Outlook: A convenient excuse for Sainsbury's

THE STOCK market was expecting more bad news from Sainsbury's yesterday and duly got it. But it certainly wasn't expecting this perennial stock market struggler to announce a hell for leather expansion in convenience stores, opening 200 Sainsbury's Locals in three years with plans for an astonishing 1,000 in the longer term.

This is certainly a bold move in a sector that has poorly served consumers for too long. Britain's pounds 15bn convenience store market has been growing at an average of 5 per cent for the past few years, helped by busier lifestyles and growing demand for "top up shopping."

It has also been growing almost in spite of itself. The brand names are weak - who would actively seek out a branch of Londis, Costcutter or Spar, for example - and often an excuse for rip-off pricing. If Sainsbury's can deliver a quality store format with near supermarket prices and a decent range of fresh foods, it should to well.

Nonetheless, there are dangers for shareholders. One is that Sainsbury's is taking on too much. Another major strategic move may be the last thing management needs just as it embarks on the biggest corporate makeover in the company's 130-year history. Having admitted that three-quarters of its stores are not up to scratch, Sainsbury's is frantically refurbishing outlets and rebranding them with its new "living orange" logo.

Operating tiny urban stores is a different logistical challenge to running out-of-town superstores, and even Tesco has struggled with it. Sainsbury's is also pressing the roll-out button after an incredibly short trial of just three stores, one of which has been open for just a fortnight. Another is in a sleepy village in Sussex, and so hardly typical.

It is good that Sainsbury's is trying to be take the initiative once more, though critics will say Sainsbury's Local is Tesco Metro seven years too late. But shouldn't management be concentrating on getting the core business right first?

Yesterday's figures show a continuing slide in sales while the store refurbishments will cause further disruption in the short run. Without the protection of the Sainsbury family's near 40 per cent stake, this company would be a sitting duck for a takeover. With the last of the Sainsburys, Timothy, leaving the board yesterday, it may be that family loyalty will weaken. Certainly shareholders will be pushing for root and branch change if there is still no sign of a turnaround by this time next year.

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Water charges

IAN BYATT, director general of Ofwat, is a stubborn old mule of a regulator, and despite howls of protest from the water industry, the chances are he won't have budged an inch from his original proposals when next Tuesday he announces his draft determination on water charges for the next five years.

Negotiations are not entirely over yet; there is a further opportunity for industry representations before Mr Byatt makes his "final, final" determination in November. But the position doesn't look encouraging for the water companies. There may be some comfort in the numbers for South West Water, but Mr Byatt seems to have dug his heels in with the rest.

Since Mr Byatt first aired his thoughts on water charges, the environmental demands placed on water companies have increased yet further. On the other side of the ledger, the water regulator can point to a further decline in the cost of capital and construction. So even if the water companies are able to claim for extra spending, Mr Byatt will argue this has been cancelled out by other factors.

Mr Byatt has been meticulous in his approach to the water charges review, making it difficult for the water companies to claim unfair process. All the same, they are more or less duty bound to say he's being too harsh. Hyder, owner of Welsh Water, claims the regulator's demands are so onerous they could push the company into a breach of its banking covenants, while Thames Water believes it may need a cost cutting merger with an adjacent water company to achieve the price reductions Mr Byatt wants.

There's no sympathy whatsoever from Government ministers, who if anything are even more hard line than Mr Byatt in believing the water companies capable of delivering higher standards for less cost. Nor do the precedents of appealing to the Competition Authority for an independent adjudication look particularly inviting. When British Gas appealed against what it famously described as "the biggest smash and grab raid in history", it ended up with an even worse deal than that proposed by the regulator.

It may be that water companies will just have to grin and bear whatever the regulator throws at them. If there's a silver lining in all this for City investors, it is that judged on the basis of past utility price reviews, there's always some flesh left on the bone, even after the regulator has had his fill.

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FirstGroup rights

DING! NEXT stop Main Street, USA. The battling busmen, Trevor Smallwood and Moir Lockhead, reckon FirstGroup has travelled as far as it can in the UK market and have turned their attention to America's school bus scene instead.

Having safely passed the entrance exam earlier this month with the acquisition of a small New England operator, they have put their foot on the floor and splashed out pounds 602m for America's second biggest school bus operator, Ryder.

The market responded by giving the busmen a ticket to ride. Even though the deal is being part-funded by that rarity these days, a discounted rights issue, the shares still managed to put on a spurt of 3 per cent. Compared with Stagecoach's acquisition of the US bus operator Coach, the price paid by FirstGroup does not look excessive. Moreover, unlike other public transport markets, it can look forward to solid growth.

The "baby boom echo" in the US over the last 20 years means there will be no shortage of students for FirstGroup to ferry around, while the need for school boards to cut budgets means the business of maintaining bus fleets will be increasingly outsourced.

The school bus business in the US is a classically fragmented market - even though Ryder is the second biggest operator, its share is only 3 per cent. According to Mssrs Smallwood and Lockhead, there's plenty of scope for in-fill acquisitions among the 5,000-odd private school bus operators. Alternatively, if the much rumoured friction between executive chairman and his chief executive gets too much, one of them could always decamp to the US, which from now on will account for a quarter of group turnover.

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