Over the past three years Tesco has overtaken Sainsbury's on most of the accepted yardsticks of success: in terms of profits, number of stores, sales growth, number of customers and market capitalisation, it is now significantly bigger than Sainsbury's. And it is fast catching up even on group sales (where Sainsbury's position is boosted by its US and DIY interests), sales per square foot and return on sales.
Furthermore, Sainsbury's has been left trailing Tesco on most of the industry's recent marketing and product innovations. Loyalty cards, financial services, home deliveries, smaller in-town convenience stores - on all these things Tesco was there first. Worse, Sainsbury's was forced into an embarrassing about-turn on the loyalty card, having first derided the concept as just an electronic form of green shield stamps. On discounting too, Sainsbury's has had to eat its words, recognising in practice if not quite yet in public that food cannot be sold on quality alone; price also matters.
The profits warning, and latest sales figures, confirm beyond all doubt that Sainsbury's is on the run, struggling to make headway and in serious danger of losing it altogether. Meanwhile Tesco continues to forge ahead. Sainsbury's sales increase in the final three months of last year is scarcely enough to match inflation, let alone pay for the company's newly launched loyalty card. Profits, too, are in full retreat and that is not just because of unanticipated costs of restructuring the Texas Homecare acquisitions. It is apparent from the figures that what little volume growth there is in the core food retailing business is having to be bought.
What's gone wrong, and can it be corrected? In some respects Sainsbury's is a victim of its own success. Throughout the 1970s and most of the 1980s it built a powerful lead, pushing the frontiers of own-label development, carefully cultivating an upmarket image for quality and choice. It worked spectacularly. The formula was only one part of the reason, however. The other was that in those days Sainsbury's largely had the market to itself.
Tesco's more recent success is built on some very basic and simple Japanese business principles: if you see a successful formula, copy it and do it better. To be fair on Lord MacLaurin, chairman of Tesco, there's obviously a little more to it than that. He's not just caught up with Sainsbury's, he's leapfrogged it. He's taken the quality and choice formula invented by Sainsbury's, and by developing a reputation (not wholly justified) for being cheaper too, made it classless and universal. It's an old trick, but not an easy one: creep up behind the complacent market leader, seize the initiative and broaden the appeal. The Toyota Corolla, as it were, has overtaken the Ford Escort.
David Sainsbury's present discomfort, then, is not wholly, or even mainly, of his own making. The simple truth is that he is having to operate in a far more competitive market than his predecessor and cousin, Lord Sainsbury. It's not just Tesco that has got its act together. Safeway, too, and even the once bombed-out Asda, are speeding up the wings. Mr Sainsbury is also having to deal with the fact that stock market expectations of the company were inflated to a wholly unrealistic level at the time he took over. A bit like Tony Greener at Guinness, he's had to grapple with some very exaggerated views of what the company is and what it is capable of. Coming to terms with reality has been a painful experience for all concerned.
In these circumstances it would be unfair and inappropriate to start calling, as some will, for Mr Sainsbury's head. Sainsbury's is still a successful, well managed and highly efficient company. It is not, like Forte, another crumbling, badly run family dynasty.
Mr Sainsbury does need to watch it, though. To be trounced by competitors as Sainsbury's has been is strong evidence of complacency and drift. As worrying, for the City at least, is the fact that before Christmas the company briefed big shareholders to the effect that everything was going swimmingly, the new management team was settling in, things were positive and the company had turned the corner. If this is turning the corner it's a new one on me.
All the same, Mr Sainsbury's new team needs more time to demonstrate what it can do. The company's announcement of a fully fledged supermarket bank demonstrates that there's life in the old dinosaur yet. For those willing to take a five-year view, this may be the time to add a few more Sainsbury's to the portfolio.
Andrew Dilnot of the Institute for Fiscal Studies paints a bleak picture of the public finances in the new "Analysis" series he is presenting for BBC radio on the National Health Service. His central thesis is that it is going to be hard to the point of near impossibility for the next government to meet the long-term spending targets set out in the latest Budget Red Book. We all instinctively knew this was likely to be the case; what Mr Dilnot does is demonstrate it beyond a shadow of a doubt.
Gordon Brown, the shadow chancellor, must be rather wishing he had had the benefit of Mr Dilnot's analysis before committing the Labour Party to the present Government's spending totals. These plans envisage hardly any real growth in spending on health to the turn of the century. This despite the fact that both parties are committed to a publicly funded health service, and, in their public statements at least, real increased spending on it.
Ever since it was set up, spending on the National Health Service has grown at the rate of roughly 3 per cent per year in real terms. That rate of growth continued unabated throughout the Thatcher years and the more recent health service reforms. Even in practical terms, halting the trend is going to be virtually impossible, for the health service cannot be capped like local authorities. In political terms it would very likely prove suicidal. People like their health service, they expect more money to be spent on it, and they are not, except at the affluent tip of society, going to give it up. For the health service at least, the Red Book forecasts are pure fantasy.
So what are the policy options? If the commitment on spending by both parties is taken at face value, there will have to be swingeing cuts elsewhere to meet the inevitable budget overrun in health. Alternatively the next government could borrow more, but both parties are as much committed to prudence on this front as on spending. Or it could raise taxes, which, unfortunately, is all too likely to be the course adopted.Reuse content