Sainsbury: the story of a supermarket Sainsbury is a well-known supermarket chain in the UK and had been primarily family run until Lord Sainsbury handed over the reigns to Dino Adrioni in 1998 and the family retained about 35% of the shares. But by 2000, Sainsbury was in crisis with falling profits, margins and market share. Mr Adrioni was fired in 2000 and replaced by Sir Peter Davis who was regarded as a potential saviour. In the decades before 2000, the Sainsbury brand was famous for combining quality with value - its motto was 'good food costs less'. Sainsbury was greatly admired for the way it was run, with an image of concern for social principles and corporate governance; it had been the subject of several business school management studies and was a well-established favourite of the UK middle classes. Sir Peter arrives Sir Peter had previously worked for Sainsbury but had left fourteen years before because he felt that the Sainsbury family would never give him the top job; since then he had made a huge impression as the CEO of Reed International and Prudential Insurance, where he had helped the company to recover from a pension mis-selling crisis. He was one of the best-known business leaders in the UK. Sir Peter, however, was not beyond criticism. First, in 2003, he was awarded shares worth several million pounds, despite the fact that Sainsbury's share price had performed 17% below the average for the sector since his appointment. Second, he had decided to become Chairman as well as CEO, which ran counter to the principles of corporate governance recommended by the Higgs Report. Indeed, some observers felt that the influence of the Sainsbury family had insulated Sir Peter from the poor outcome of his policies. Third, some industry critics felt that he did not relate to the ordinary shopper nor understand their tastes; he was a director of the Royal Opera and known to appreciate the finer things in life. What Sir Peter did It could be claimed that Sir Peter had done much of what he had set out to do, in that profits increased for two years running up to 2003. He had aimed to reduce operational costs by 700 million per year and actually achieved 900 million. He invested 2 billion to modernise stores, renew IT systems and improve supply chains. But, on the other hand, market share had fallen by 0.5% in 2003 alone and Sainsbury was in danger of being overtaken in second place by Asda. Food retailing in the UK was dominated by a few big names, with the top three sharing 60% of the market: Graduate School of Business Examinations 3 Market Share (%) 2003 Tesco 27 Sainsbury 17 Asda (owned by Wal-Mart) 16 Safeway (under threat of acquisition) 9 Morrison (attempting to acquire Safeway) 6 It was also felt that he had invested too much in the South of England, at the expense of the rest of the UK, and had not invested in innovation in areas such as in-store bakeries and delicatessens that customers actually see. Another problem was that while market share for food was declining, Sainsbury had failed to increase non-food sales which both of its main competitors had achieved quite successfully. The result was that Sainsbury was more dependent on its food sales than either Tesco or Asda. Non-food sales 2003 (% of turnover) Sainsbury 13 Tesco 18 Asda 20 Sir Peter goes up and out In 2004 Sir Peter was replaced by Justin King but remained as Chairman of the Board. Later that year he was forced to resign because of a shareholder revolt over his high salary and bonuses when profits and share price were falling. It was generally felt that, after four years, he had failed. Sainsbury's market share was overtaken by low pricing Asda and was under pressure from the newly combined Morrison/Safeway. It had also been beaten for quality by Waitrose and Marks & Spencer and beaten on both price and quality by market leader Tesco. Sir Ian Prosser was picked to succeed Sir Peter but was fired after a few months making Sainsbury look like a company that could do nothing but irritate its shareholders. By 2004 it had become a gaffe-prone company and appeared leaden-footed compared with Tesco. What had happened to market position? Graduate School of Business Examinations 4 Marketing analysts claimed that Sainsbury was relatively expensive in the eyes of customers. Although Sainsbury's prices were not actually significantly higher than competitors - about 2% higher than Tesco and 5% higher than Asda - the fact that Sainsbury had cultivated the image of 'high price quality leadership' in the past made it hard to shake off the image of high prices at a time when it did not appear to offer the high quality associated with Waitrose. Enter Justin King Justin King was chief executive of Marks & Spencer food division when he was recruited by Sainsbury in 2004. One of his first actions was to remove the Colleague Christmas Bonus, which did not go down too well with employees. He then instituted his turn-round programme titled 'Making Sainsbury's Great Again'. By early 2008, just before the financial crisis began to bite, Sainsbury's had increased sales for 13 consecutive quarters. Mr King explained his success in the following terms: When I joined there was this strategic conundrum. People were saying Sainsbury's is in the middle of Waitrose and M&S focusing on quality and Tesco and Asda focusing on price. We said we think the middle is the place to be. Now people are talking about others moving into the middle and how are you going to protect your ground? How's that for a transformation? We've gone from being in the place where no one wants to be to the place where everyone wants to be. Mr King followed competitors and extended Sainsbury's range into non-food products and by 2008 introduced 1,700 cut-price products, ranging from bathroom fittings to kitchen equipment. One of the features of the turnaround was that it was achieved mostly by the people who had been there before Mr King started. For example, 90% of the senior staff in 2011 had been employed for four years or more. Mr King's hands-on management style might not appeal to everyone, with his habit of turning up unannounced to inspect stores on Fridays. Long term success? There seems little doubt that Mr King averted failure for Sainsbury and managed to maintain its market position in a highly competitive environment. Market Share (%) 2010 Tesco 31 Sainsbury 16 Asda (owned by Wal-Mart) 16 Morrison (acquired Safeway 2004) 12 Graduate School of Business Examinations 5 But critics point out that these are not the only success factors. The day Mr King joined Sainsbury the stock price was 2.79; eight years later it was virtually unchanged. At the same time, the profit margin was 3.5% compared with Tesco's 6%. In 2011, despite the slowdown in consumer spending, Mr King had his eye firmly fixed on growth, with a 5% increase in the number of shops, increased on-line presence, additional non-food items and potentially international expansion; business commentators have expressed serious reservations about the latter. Required Compare Sir Peter Davis' effectiveness as Sainsbury's CEO with Justin King using the process model and supporting models. (30 Marks)