Investment: Sainsbury's reveals a sudden loss of appetite

SO MUCH for food retailers as defensive stocks. Yesterday's grim trading update from Sainsbury's challenged the received wisdom that people will carry on spending in supermarkets when times are rough.

Static same-store sales and a gloomy outlook helped reverse some of Sainsbury's recent outperformance against the stock market. The only consolation is that the problems are not its own - shares in Asda, Tesco and even Kingfisher all lost ground yesterday, suggesting the gloom is industry-wide.

Admittedly, five weeks' poor trading does not spell a recession. But like-for-like sales growth in the supermarkets was just 1 per cent. Given that price inflation is running at 1.5 per cent, sales volumes actually declined.

Meanwhile, the DIY market has fallen off a cliff. Like-for-like sales at Homebase dropped almost 1 per cent, even though Sainsbury's reckons it maintained market share.

For now, chief executive Dino Adriano is sticking to his target of 1- 2 per cent like-for-like volume growth for the full year.

He also maintains the group is on track to splash out pounds 800m on capital spending for the year, although he admits the brakes may have to come on if conditions don't improve.

Sainsbury's remains wedded to food retailing - it is expanding its small convenience stores while resisting the move into selling a broader range of goods.

In theory, this should make Sainsbury's more recession-proof. But the fact that consumers associate its supermarkets with quality rather than low prices suggests it may lose market share if demand falls.

The shares, which dropped 34p to 525p yesterday, now stand on a forward earnings multiple of 19 - a 10 per cent premium to the rest of the sector - and are high enough.