Feature: Brand Sainsbury: outlook not as rosy as Red Nose Day

Red Nose Day is finally upon us, and the tell-tale signs are all there: thousands of people are volunteering their time in support; celebrities are reciting their speeches, and schoolchildren are salivitating at the prospect of not having to conform to the usual school uniform strictures for one day of the year.

But have you ever wondered which retailer actually sells the multitude of red nose merchandise? This year Sainsbury’s is the exclusive retail partner. Sainsbury’s stores across the country will be brimming with official merchandise including the biggest ever Red Nose, Pin Badges and Big Smelly Nose Balls. Staff are gearing up to help ‘paint the aisles red’. Indeed, from beautiful bouquets, to gorgeous ginger bread men and bold red hairspray, there will be all sorts of special Red Nose Day goodies on offer at Britain’s third largest food retailer.

Sounds exciting, doesn’t it? Unfortunately, in the board room of Sainsbury’s not everything is as positively uplifting as Comic Relief. Indeed, if anyone is in need of some charity perhaps it is Sainsbury’s itself? The cold logic of brands is that they are only valuable if they can generate sales – something Sainsbury’s seems to have forgotten about. For over ten years Sainsbury’s has been losing market share to Tesco’s which now has an astonishing 30% of the market compared to Sainsbury’s 15%. Even worse, Sainsbury’s has now been overtaken by the likes of Asda to make it only the third largest food retailer in Britain. That’s pretty abysmal considering Sainsbury’s was the market leader for much of the twentieth century.

How did Sainsbury’s get here? The company was founded in 1869 when John James Sainsbury and his wife Mary Ann opened their first store at 173 Drury Lanein Holborn, London. From there John James built up a chain of supermarkets which numbered 128 when he died in 1928. According to legend, his last words were “Keep the shops well lit.” In 1950 the first self serice branch opened in Croydon, and in 1973 the company was floated on the London Stock Exchange.

In 1992 the long time CEO John Sainsbury quit, to be replaced by his cousin David Sainsbury. For many, this was the beginning of the long rot – which still exists today. Consider the following: in 1992 Sainsbury’s was Britain’s biggest supermarket group with the fattest margins, the biggest sales densities and the best store sites with Tesco trailing a poor second by most measures. Why did everything go downhill from 1992?

According to The Times, which has interviewed senior executives from Sainsbury’s: “John left a yawning management gap when he retired. The hands-on, autocratic, obsessive John had built a money machine in his two decades at the helm. But he took all the decisions himself and surrounded himself with yes men. When the thoughtful, consensual David took over, there was no one to help him to take decisions and the inter-departmental squabbling began.”

One adviser to the company at the time agrees that the succession was the turning point. “This is undoubtedly a management story. The mistake was to appoint David Sainsbury, who wasn’t really cut out for the job.”

Even David’s successors, Dino Adriano and later Sir Peter Davis, could not stop the rot. Major mistakes included the decision to reject loyalty cards, the reluctance to move into non-food retailing, the uncertainty about where to position the company on the line between value and quality, and the sometimes brutal treatment of suppliers. And, of course, there was the disastrous John Cleese advertising campaign – titled “Value to Shout” about – which many said actually led to a fall in sales.

Sir Peter, although well received by investors in 2000, also made the disastrous decision to invest £3 billion to upgrade stores, IT and distribution centres. Part of this investment involved investing $100 million in four fully automated depots, which according to many insiders were technically and logistically flawed. The delays wrought by the distribution system, together with all the other strategic, branding and marketing errors created a vicious circle. Once Sainsbury’s had departed from the virtuous circle — where strong sales growth gives good cash flow which is reinvested back in the business — it was harder to climb back on. The huge family shareholding did not help either as it ensured there was less outside shareholder pressure to stop the rot.

Justin King has addressed a lot of these issues – most notably the distribution problems by cutting bureaucracy and investing in frontline shop floor staff. And since the launch of King’s recovery programme the company has reported eight quarters of sales growth. Yet according to the latest market share report from October 2006 Sainsbury’s market share was 15.7%, behind Asda’s at 16.6% and Tesco at 31.4%. So things may have improved, but Sainsbury’s is still nowhere near to regaining its former position as the UK’s number one retailer. And now there are rumours that the Chief Executive of Marks & Spencer, Sir Stewart Rose, is considering a takeover of Sainsbury’s. Can you imagine it: Marks & Sainsbury’s? But, then again, perhaps this is the only way to resurrect a once towering retail giant and trump Tesco’s?