Family Fortunes

Can the Sainsbury family see off the toughest competition it has ever faced?

Rags to riches and back in two generations, goes the old City adage. You get the general idea: enterprising father builds business, son gently dissipates the inheritance, and the grandson finishes the job by throwing it all away. Moral: beware of investing in dynastic companies run by the third or fourth generation.

There are plenty of exceptions - bankers like Rothschild or grocers like Sainsbury's. At least until yesterday. Sainsbury's, for generations purveyors of quality groceries to the middle classes, posted its first slump in profits since it became a public company, with earnings tumbling to pounds 712m last year compared with pounds 809m the year before.

Is the fabled family dynamic finally asserting itself within what was once Britain's largest food and wine retailer? "Was" being the operative word. Tesco, the erstwhile cheap and cheerful "pile it high, sell it cheap" grocer to the plebeian classes, has acquired style and last year stole the Sainsbury crown as the UK's largest food retailer.

Certainly the burden of the generations weighs heavily on the shoulders of chairman David, the sixth Sainsbury to run the company since it was founded in 1869. Every morning he walks along the corridors to his office on the fourth floor of the firm's headquarters in central London past the busts and portraits of his forebears, four generations of grocers who created Britain's most powerful commercial dynasty from the foundations of a single shop in Drury Lane.

He may be Britain's richest person, apart from the Queen, but his every commercial move is watched over by his uncle John, Baron Sainsbury of Preston Candover, who was chairman of the business from 1969 to 1992. Though officially retired, he maintains an office on the sixth floor from where, as joint president of the company, he is said to monitor and sometimes question the moves his successor makes in what has turned out to be the most traumatic period in Sainsbury's 127-year history. Insiders report shouting matches.

The firm yesterday blamed the fall in profits partly on the pounds 48m it had to shell out to convert the Texas do-it-yourself stores it bought more than a year ago into its own Homebase format. But the City's verdict was more wide-ranging. The company is a victim of its own arrogance, said Robert Clark, director of the marketing analysts Corporate Intelligence. "Sainsbury", he said, "has been like a supertanker, wallowing in its own wake, unable to turn round."

"It's serious," said Dr Terence Gourvish, director of the Business History Unit at the London School of Economics. "They have lost their first-mover advantage of producing for the middle-class market. They are reaching a point where they must have a serious reorientation."

For generations, Sainsbury's has been the place where the English Home Counties' middle classes bought their groceries. (Stores in Wales and Scotland opened only relatively recently.) In its early years, when other grocers were cluttered and often insanitary, the one started by Mary Ann Staples, who had grown up in a dairy business, and John James Sainsbury, a hardware merchant and grocer, was distinguished by its cleanliness, order and high-quality produce.

Over the years it became an institution which was respectable yet innovative. During the First World War, when fresh food was scarce, it pioneered its own-label jams, spices and potted meats. In the Twenties, it established branches along the new suburban railway lines. It maintained service with mobile shops when its branches were destroyed in the Blitz. It opened the first self-service store, modelled on America's burgeoning supermarkets. By 1955, it had opened the largest supermarket in Europe. Warehousing was computerised in 1969; the first supermarket petrol station was opened in 1974; Homebase home and garden centres came along in 1981. It was at the forefront of bar code scanning technology, and its exotic new products, from strange fruits to fromage frais, helped to transform the diet of the English family and left its rivals struggling to keep up. Hand in hand with all this went a concern for good relations with its staff and the community.

When David Sainsbury took over as chairman in 1992, he was in stark contrast to his predecessor. Lord Sainsbury had been an autocrat, feared and yet respected as "a man with a gut instinct for the grocery business". He ruled through rigid lines of command, with power concentrated in the hands of an inner sanctum at the top of the company. David Sainsbury is different. "He is a diffident, cerebral man with passions outside supermarkets," said one insider. An old Etonian who lives modestly in Notting Hill, his hobbies include plant biology and politics - he is patron of the Social Market Foundation and a friend of David Owen. If he had not been born a Sainsbury, it would never have occurred to him to become a grocer.

Since he took the helm, Sainsbury's shares have slumped from 579p to 372p, under-performing the FT-SE 100 index by 48 per cent and the supermarket sector by 28 per cent. Since 1992, pounds 1.2bn has been wiped off the value of the family's 40 per cent holding.

"He has introduced a more consensual management style," one industry observer said. "He asks people what they think, but because of the way Sainsbury was run in the past they are not used to thinking." Others say Sainsbury is trapped in a time-warp. "There is something almost Dickensian about Sainsbury's," says Richard Hyman of the retail consultancy Verdict research. "It is class-ridden. Tesco and Asda are much more egalitarian."

These are the firms that have proved David Sainsbury's nemesis. Since Sir Ian MacLaurin took over as the chairman of Tesco in 1973, he has transformed the company from a down-market, discount retailer to the equal of Sainsbury's both in market share and quality. Its marketing and customer service has been judged much cleverer - as was evidenced by the success of its loyalty card, introduced last year, which has doubled its rate of sales growth (now three times faster than Sainsbury's). And Asda became one of the best-performing stocks in the Footsie last year under Archie Norman's recovery programme, which includes gimmicky promotional schemes such as singles nights, pet stops and brolly patrols.

While rivals have been innovating, Sainsbury's has carried on much as before, responding chiefly by engaging in periodic price wars. Terence Gourvish at the LSE explained: "In the age of the two-job family, the trickiest segment is ready-made meals. Marks & Spencer and Tesco have been very imaginative there and Sainsbury's haven't - at least that's the market perception."

Most significantly, David Sainsbury has split the roles of chairman and chief executive, stepping back from the day-to-day running of the supermarkets. The new chief executive, Dino Adriano, who was appointed in January, has disbanded some of the Sainsbury's committees which made decision-making so slow. A new, much younger marketing director, Kevin McCarten, has been brought in from Kingfisher; a new corporate communications director, Dominic Fry, has been recruited from Eurotunnel, a sign that the company feels it needs better "crisis management skills".

Nobody is writing the obituary for Sainsbury's. If it is a family firm in crisis, it is not a crisis of the magnitude of that which has seized the Littlewoods empire since the death of Sir John Moores in 1992, the Forte group early this year, or the Gucci dynasty, which dissolved after only three generations when an Arab investment company stepped in and settled its global debts.

Parts of the business have flourished in the past few years. DIY has been a great success in the 17 years since Sainsbury's opened its first Homebase store. In North America, it took control in 1987 of Shaw's, a New England supermarket chain, and has steadily increased the number of stores, boosted sales per square foot, and improved operating profit; profits rose 15 per cent in the first half of the last financial year, to $42m. It has also bought 16 per cent of Giant, America's 15th largest food retailer, and Giant's shares have risen 50 per cent since it took its stake.

But some insiders suspect David Sainsbury's lust for overseas conquests has contributed to the neglect of the British food business in the past few years. Why else would the supermarkets have failed to take up the concept of loyalty cards, which were pioneered by Dino Adriano when he was head of Homebase? Its Spend & Save card, held by more than two million customers, has played a large part in its success. Yet the company left it to Tesco to seize the opportunity in supermarkets.

Yesterday, David Sainsbury pledged to be more aggressive and to claw back the ground lost to Tesco and Asda. He admitted that Sainsbury's had made mistakes and had "lost the marketing battle" in which it has been outmanoeuvred by Tesco and Asda. He announced the firm's plan to develop loyalty programmes, which will include a loyalty card and a credit card with add-on financial services that could include a deposit account, pensions, or PEPs. The question must be: has he left it too late?