Sainsbury’s: a punt on recovery

retail sector: Sainsbury's a punt on recovery - at - the best of the week's international financial media..

Who'd want to run a retail chain in the UK? One by one the great high street names seem to be falling. First it was Marks & Spencer, which no longer dresses Britain. Then it was Boots, which no longer sells much in the way of cosmetics, and WH Smith, which can't seem to figure out how to sell books. Now it's Sainsbury's. Once one of the UK's most venerable brands, it warned this week that it could be heading for its first loss in 135 years.

No wonder, says Jan Moir in The Daily Telegraph. Not long ago, Sainsbury's was the top choice for middle-class shoppers keen to pick up everyday basics alongside more exotic items, such as Madagascan vanilla pods, says Moir. Not any more. Today, the firm has an "acute personality disorder; it simply doesn't know who it is". In diversifying and adding cheaper ranges and non-food items it has "diluted the cocktail and damaged the once golden brand". It wanted to be all things to all shoppers, but it's ended up in meltdown mode, selling scores of different varieties of loo roll ("vitamin-E enriched with extra aloe vera, embossed, extra soft, or decorated"), but no Dijon mustard. You can get better prices at Tesco and Asda and better quality at Waitrose and even at the much-maligned M&S.

New CEO Justin King has certainly taken on a nasty legacy, says the FT. When his predecessor Sir Peter Davis took over three years ago, he blamed tired stores, a clunky supply chain and poor IT systems for the problems and promised to sort them out and "generate operating margins comparable with industry leaders". Seven months ago, after spending £3bn on a new distribution system that clearly doesn't work, he was replaced with King. Seven months later, "nothing much has changed". So what next? Even King admits that the title for his business review this week - "Making Sainsbury's Great Again" - was a tad ambitious, but at least his priorities are simple. He intends to make sure the shelves at a Sainsbury's near you are full, to bump up sales, and to live up to his new slogan: "Great quality food at fair prices."

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But will it work? The answer from most commentators is probably not. The UK food retailing market is insanely competitive and, to regain its position, Sainsbury's will have to drag customers away from Tesco and Asda (no easy task) and stop them drifting off to Morrisons, which, via its recent buy of Safeway, has every intention of knocking Sainsbury's into fourth position in the market. To most sector watchers, Sainsbury's is, as Robert Preston puts it in The Sunday Telegraph, "shop soiled".

But is Sainsbury's really so irredeemably rubbish? Things look bad now, but don't forget that not even a decade ago Sainbury's was a clear leader in the sector and Tesco was an also-ran. What if King can stop - and reverse - the rot? He intends to increase sales by £2.5bn (17%) in the next three years - £400m of that is to come from convenience stores, £700m from homewares, and the rest from groceries. He has also hired distribution specialist Lawrence Christensen, formerly of Safeway - a man who says that he hasn't encountered any problems he hasn't seen before - to sort things out, says Julia Finch in The Guardian. The Central and Savacentre trading names are also to be abandoned and 130 stores updated and food quality improved. All this sounds like a reasonable plan and King, at least, is "completely confident". That might make it time for investors in the sector to switch out of today's clear winner - Tesco - into what might end up as a very interesting recovery story - Sainsbury's.