Davis paid £3m as Sainsbury's profit falls

Sir Peter Davis was paid more than £3m to run J Sainsbury last year even though the struggling supermarket chain reported a fall in profits and failed to lift its underlying sales.

The former chief executive, who stepped up to become chairman last month, was awarded 864,000 of a possible 1 million shares on top of his £850,000 salary. From July, Sir Peter is to be paid £500,000 to chair the group, which was recently overtaken by Wal-Mart's Asda as the country's second biggest supermarket.

Details of Sir Peter's pay package came as the group's new boss, Justin King, attempted to stamp his authority on the business by shaking up its management team. He fired Stuart Mitchell, a 22-year Sainsbury's veteran who ran its UK estate, and hired Jim McCarthy, who used to run the T&S corner shop group, to head its convenience stores.

Shareholders were unimpressed by Sir Peter's award of shares, which are restricted until July 2005. Valued at yesterday's share price, they were worth £2.37m. "We were surprised by the bonus package, given the trading performance and other issues," one top 10 investor said. Roger Matthews, the finance director, is the only other board member who will be paid a bonus.

Mr King signalled that the group would have to sacrifice profits to make its prices more competitive as he railed against its lack of customer focus. He said the three-year programme to overhaul its supply chain and IT systems had made it "inward looking", adding: "The inevitable consequence is we haven't served our customers as well as we should."

Analysts at Cazenove warned that profits could halve over the next two years, given the tough outlook for the supermarket sector. This could create "irresistible pressure" for the company to cut the dividend, which was held last year at 15.7p, they warned. Seymour Pierce cut its profit forecasts for 2005 to £470m from £560m.

Sainsbury's pre-tax profits fell by 8.5 per cent to £610m during the year to 27 March, in line with its profit warning two months ago. It blamed the shortfall on the need to sacrifice its profit margin in order to lower its prices during the fourth quarter: its operating margin fell by 50 basis points during its second half to 3.5 per cent.

Mr King, who has lowered prices by 2 per cent so far this month according to analysts at JP Morgan, said he would stick to Sir Peter's strategy of positioning the group in between Tesco and Asda at the value end and Marks & Spencer and Waitrose at the quality end. "We will be fleet of foot on pricing," he said, despite insisting the group would never compete on pricing alone. "We're not doing a good enough job on pricing, quality and service. I am absolutely sure that when we improve on those we will see an improvement in the sales line."

Sainsbury's shares rose 5p to 274.75p on hopes that Mr King, who has worked at Marks & Spencer and Asda, would manage to turn around the business, although one analyst said: "I don't see any quick fixes."

Mr Mitchell, the third director to leave the company in recent weeks, is entitled to compensation of more than £600,000.