Sainsbury: the grocer's legacy

Better food at higher prices is what we really want, says the supermarket's departing boss.

BRITAIN faces a future of more expensive but higher quality food. That is the view of Lord Sainsbury of Turville, who is stepping down as chairman of Britain's second-largest grocer to become a working Labour peer.

"Unlike 20 or 30 years ago, people are prepared to pay a premium for quality and convenience. We see big opportunities for new products and better quality products," says David Sainsbury.

The trend means far more than supermarkets selling fresh as well as tinned pasta. By expanding floor space British supermarkets can increase the variety and range of foods available. This often means higher quality food at higher margins to meet consumer demand.

Lord Sainsbury believes British farmers are responding to this trend. "There is a much clearer understanding that the food chain, from grower to retailer, has to work together. For example, we have set up a club of organic farmers to get the produce we need." Demand for organic produce, in particular, continues to outstrip the supply in Britain.

This need for partnership has lead Sainsbury to rethink its traditionally tough attitude towards suppliers and growers. Lord Sainsbury insists there has been a great improvement during the past two to three years.

Selling higher quality food at higher prices is not the only way supermarkets are trying to sustain growth and lift margins. They have moved into pharmaceuticals, health and beauty products, and petrol retailing, where they now have significant market shares. Sainsbury has set up its own bank, attracting pounds 1.5bn in deposits and lending pounds 400m through credit cards, personal loans and mortgages.

"We will move into areas where we see things compatible with our brand and where we can improve on what customers are getting," says Lord Sainsbury. By not meeting the costs of a branch network, Sainsbury can offer customers better terms than high street banks.

Critics of the big supermarkets say the supply of out-of-town centres will dry up. These have fuelled the supermarkets' growth in the 1980s and 1990s. But saturation has yet to bite; last year Sainsbury opened 18 new supermarkets.

Lord Sainsbury admits that out-of-town expansion is reaching its limits. But he does not expect the weekly shopping run for most Britons to return to town centres, as some environmentalists demand. "People like to drive to a car park that is on the same level as the store, do their shopping, put it in the car and drive off. It is nonsense that the average housewife could do the weekly shop using a bicycle."

Research suggests shoppers strongly dislike using multi-storey car parks for food shopping. Restricting access to out-of-town shopping is no solution, Lord Sainsbury claims. "Most are willing to drive long distances to get same-level car parking. That, of course, is very damaging to the environment."

Supermarkets are rethinking city-centre stores following the success of Tesco's Metro shops. Sainsbury has launched a format called Sainsbury's Local, in Balham and Clapham, south London. And Marks & Spencer is expanding its food-only outlets in inner cities.

These smaller stores are unlikely to change consumer preferences for large, out-of-town supermarkets.

"Over the last 30 to 40 years, the number of our stores has not greatly changed. What has changed is their size and the amount of business we put through them, which has increased massively. That is continuing," says Lord Sainsbury.

He does not expect further mergers or acquisitions among the four UK supermarket giants, Tesco, Sainsbury, Asda and Safeway. There have been reports that Asda and Safeway may merge, but this move would face regulatory problems.

"It is quite difficult to see further consolidation. If there is any merger, quite a lot of stores would have to be sold off. And the Monopolies and Mergers Commission might rule it out."

British supermarkets have been slow to expand overseas compared to continental rivals. Carrefour, the French hypermarket giant, has successfully moved into Spain, Portugal and Brazil, while Tengelmann, the largest German grocer, owns A&P, the giant American chain. But challenging entrenched national champions is tough. Tesco withdrew from France rather than take on Carrefour. The leading German discounters, Aldi and Lidl, are moving into Britain, but to no great effect. Marks & Spencer, which has flourished in France, has confirmed expansion in Germany. Sainsbury has been criticised for going into North America through the purchase in 1987 of Shaw's, the New England chain. Losses caused by swift expansion in Connecticut reducedprofits last year. Lord Sainsbury says: "The main Shaw's business does extrem ely well. It is difficult to break into new states, but we have a steady business making a good profit." Nevertheless, there is speculation in the City that Lord Sainsbury's departure will prompt a change of strategy, not least in America. One analyst said: "It would be an opportunity to review the business and, if things do not improve there, I would not b e surprised if they decide to sell it." The Sainsbury family, which owns 40 per cent of the company, would need to be convinced that its overseas expansion had failed. Lord Sainsbury insists that margins and returns at Shaw's rank among the top 25 per cent in the industry. For the first time in 120 years, leadership at Sainsbury has passed outside the family. It goes to George Bull, the non-executive chairman, and Dino Adriano, the present chief executive. The family ethos remains, though. The route from the boardroomto t he lift leads past canvases belonging to the Sainsbury art collection and through a marble arch commemorating the members of staff killed in the world wars. Lord Sainsbury, a philanthropist who helped fund the Social Democrat Party in the 1980s, is a firm Labour supporter. "On all the big issues such as the economy and foreign policy, they have done extremely well." New Labour, he says, has gone beyond the S DP in stressing entrepreneurship and business.