Sainsbury's unveils £2.5bn rescue plan

* Supermarket group plunged into loss * Davis legacy results in £550m write-down * Dividend halved

J Sainsbury admitted yesterday that its fortunes would not improve for at least 18 months as it unveiled an ambitious plan to increase sales by £2.5bn over the next three years.

J Sainsbury admitted yesterday that its fortunes would not improve for at least 18 months as it unveiled an ambitious plan to increase sales by £2.5bn over the next three years.

Justin King, the new chief executive, issued a damning indictment of the former management as he put the cost of rectifying past failings at £550m. He said £3bn spent by Sir Peter Davis, the former boss, on overhauling the group's distribution and IT systems had made its availability "worse than ever".

Issuing its fourth profits warning since March, the struggling supermarket group said the £550m hit to its bottom line would catapult it into the red this year, given that second-half profits are not expected to top the £125m to £135m achieved in the first half. At best, Sainsbury's, which made an exceptional £275m profit from selling its US arm, is on track for underlying pre-tax profits of £270m, while Tesco's profits are forecast to top £2bn. Although Mr King said increasing sales would be the "cornerstone to the group's recovery", he ruled out even managing to grow sales in line with the industry until the second half of its next financial year. It will take a further 12 months for profits to begin to recover, analysts estimated.

Sainsbury's plans to invest up to £1bn over the next three years on rebuilding its battered reputation for "quality food at fair prices". Up to £600m will be funded from "ongoing buying efficiencies" of 100 to 150 basis points each year as it seeks to consolidate its suppliers. It has already cut its milk and beef suppliers. Mr King said the previous regime's decision to use these savings to shore up Sainsbury's bottom line was "fundamentally flawed".

The group underlined the extent of its challenge by revealing that despite investing heavily in prices, its like-for-like sales excluding petrol fell 1.1 per cent during its second quarter. Underlying interim sales excluding petrol declined 0.9 per cent.

Mr King promised a "total cultural shift" as he sought a "real departure" from the previous strategy of boosting the bottom line. He lambasted the group's "overly bureaucratic" management style, which resulted in no one being sure of their responsibilities.

In an attempt to improve the group's dire track record on availability in time for Christmas, the group will abandon much of the overcomplicated automation installed by Sir Peter, and revert to manpower. Mr King said 50 per cent of the group's availability issues were "resolvable in store" by employing an extra 3,000 staff. He will also reopen its depot in Buntingford, Hertfordshire, to "save Christmas". He said neither the depots nor Sir Peter's much-vaunted automation would ever work as originally envisaged. The group is writing off £120m of its investment in its supply chain and £140m in IT system, as well as £80m of stock - much of which was left to rot at the back of stores because managers were unaware it was there.

Admitting it was a mistake to outsource its IT capabilities to Accenture, Sainsbury's said it would rebuild its internal capability while renegotiating its contract with the consultancy firm. "I am confident that as we approach our future we will deliver success," Mr King said.

But the City was less sure. Standard & Poor's cut Sainsbury's investment rating to one notch above junk, while Moody's threatened to follow suit.One top shareholder said: "Our view is there is more pain than gain."

Sainsbury's halved its annual dividend to 7.8p in a move that saves it £135m. It said it would shut 12 Sainsbury's Local stores, review its relationship with Nectar, its loyalty card provider, and consider pulling out of its forecourts venture with Shell.