CHECKING OUT SAINSBURY'S: The man from the Pru has gone to the supermarket, where a demoralised staff and a dwindling number of customers await him. The new chief executive is Sainsbury's last throw in a game it used to win but now looks close to losing f

CHECKING OUT SAINSBURY'S: The man from the Pru has gone to the supermarket, where a demoralised staff and a dwindling number of customers await him. The new chief executive is Sainsbury's last throw in a game it used to win but now looks close to losing f

Last Updated: 31 Aug 2010

Down at your local branch of Sainsbury's next month it will be back to basics with Sir Peter Davis. Clean sheets and new beginnings have been a strong feature of the man from the Pru's approach in recent years. He chaired the Government's New Deal task force, came squeaky clean about Prudential's pension mis-selling and was also involved in the Basic Skills Agency. And, of course, you don't get nearer genesis than an Egg.

A return to first principles at Sainsbury's is thought long overdue by many weary shareholders, not least the Sainsbury family, which still holds 39% of the stock and is, therefore, not quite so Croesus-like as a few years ago. Davis, a big, well-connected bruiser, who began his career selling jukeboxes from the back of a car, may be the man to do it. He's even had 10 years in the Sainsbury trenches - back when it was Tesco which took all the artillery punishment - from 1976 to 1986, before his career progression stalled. Those now battle-scarred Sainsbury's staff must be hoping, nevertheless, that we do not see a repeat performance of his fronting the Prudential's advertising. Another well-known face pushing a trolley around the aisles would be more than they could bear.

The run-up to his appointment was grim. In October, the company's pounds 20 million price-cutting campaign, aimed at wresting back the initiative in the supermarket wars, was comprehensively trounced by Tesco's campaign worth 10 times as much. Next, Sainsbury's tried to reinvigorate its core business with a boardroom reshuffle, but the move was ridiculed by the City as a hopeless fudge. Then in November, a 30% fall in first-half profits, to pounds 297 million, demonstrated that the group was continuing to lose ground to Tesco, as well as confidence and support. 'You almost feel sorry for them,' said one City analyst. 'They can't seem to do anything right.'

Even the common touch of the fly-on-the-wall TV documentary went sour for the supergrocer when, in their wisdom, the Sainsbury spinmeisters put up the then chief executive Dino Adriano for the BBC's Back To the Floor series, in which top executives descend from the boardroom to sample life among the troops. Poor Adriano ended up looking like the patsy in a custard pie fight. Some of the company's most basic problems were mercilessly exposed on network television. It was a public relations nightmare.

Sainsbury's may be one of Britain's best-known and best-loved retail names with a history dating back 130 years, but it is now in a state of crisis. Its profits are lower than they were six years ago. It ceded the crown of Britain's largest grocer to Tesco in 1995 and the gap between the two is widening all the time. The market is getting even tougher.

Critically, Wal-Mart's pounds 6.7 billion takeover of Asda is increasing the pricing pressure in an industry already hit by low food-price inflation.

Consumers, egged on by the 'rip-off Britain' campaign, are ever more value conscious, and an exhaustive Competition Commission investigation into supermarket pricing looms. Sainsbury's does not appear to have a strategy to secure a place in this aggressive new world.

Boardroom tension between Adriano and David Bremner, deputy chief executive, preceded January's changes at the top. Reports had also begun appearing in the press saying the Sainsbury family was ready to sell its stake.

Just over 30% of the shares are held in trusts overseen by Judith Portrait, the family's lawyer, and Portrait is understood to have appointed Dresdner Kleinwort Benson (DKB) as a possible prelude to a sale.

At one point in October the Sainsbury board was moved to issue a denial that its financial advisers were seeking a rescue deal. This followed banner stories in the Sunday Times and Daily Telegraph, which may have been wrong but which fuelled the sense in the City that the previously unthinkable had become inevitable - that Sainsbury's would soon be swallowed up by a rival grocer from Continental Europe or America. Potential predators include Delhaize of Belgium and the Dutch chain Ahold.

All of this, combined with more than 2,000 job cuts last year, has inevitably had a devastating impact on staff morale. One head of a major food manufacturer says the Sainsbury's head office appears in disarray: 'No one will make a decision because they don't know how long they're going to be there.'

So how on earth did a company so powerful get itself into this position? How did a company with a brand so strong, with a market share once so dominant, allow itself to be outmanoeuvred by a parvenu like Tesco? And can Sainsbury's ever bounce back and become a retail powerhouse again?

On the latter point, analysts are divided. The City says Tesco is too far ahead, and the muscle of Wal-Mart-backed Asda is too great for Sainsbury's to have a chance of making a comeback.

Others are more optimistic, however. One says: 'Sainsbury's is one of the best retail brands in the world and still remains a byword for middle-class values. It has drifted from one mistake to another, but there is a great opportunity for somebody to come in and shake it up.'

A rival supermarket executive believes Sainsbury's can mount a comeback if it forgets about tacky price campaigns and returns to its roots as a high-quality grocer, territory currently occupied by Waitrose. 'Sainsbury's has always been about 'Where good food costs more'. It should be about top product quality and real innovation, but where you pay an arm and a leg for it. The opportunity to do that is even greater now that Marks & Spencer is struggling.' He says though that to stand any chance of recovery Sainsbury must jettison its non-food business and focus on the core UK chain. 'They should sell Homebase, get rid of the US businesses and make themselves the best food retailer in the world.'

What unites supporters and critics is the conviction that, to have any chance of a prosperous future, Sainsbury's must throw off the weight of its past. Davis could be the right man to break free from the family firm's oppressive culture. If he turns out to be an inspirational leader Sainsbury's should be able to restore itself as a real force in the sector.

The story of Sainsbury's decline is a painful one and, like most corporate slides, is the result of a combination of factors rather than one calamitous mistake. But a key issue underscoring all the other problems has been the culture of the business, which is based on the ponderous ethos of the classic family firm. Since its formation in a single shop in London's Drury Lane in 1869, Sainsbury's was run by a member of the founding family - right up until 1998. Its influence was all-pervasive. While other staff were called simply by their surnames, members of the Sainsbury family were addressed deferentially as 'Mr John' and 'Mr David' and so on. In the 1960s, there were six Sainsburys in top executive positions. Adriano, who started out 35 years ago in financial control at the group's south London offices, once compared a family member dropping in to a royal visit.

To this day, the Sainsbury's directors have their own entrance to the group's head offices in London's Stamford Street, an entrance far grander than the rather drab lobby for the rest of the troops.

The atmosphere of the HQ is sombre and strained and in sharp contrast to the busy, vibrant air of Tesco's head offices in Cheshunt, Hertfordshire, or Asda's modern nerve centre in Leeds. As with other family businesses, this patriarchal culture made Sainsbury's slow and hierarchical. The old-fashioned group was run by committees. Decisions were constantly referred upwards for approval, ultimately by a family member. 'It really was an arthritic place,' one insider says, 'and it has only begun to change relatively recently.'

The bureaucratic nature of the business was compounded in the 1970s and '80s by the elevation to chairman in 1969 of John Sainsbury, Lord Preston of Candover, who was, by common consent, an excellent retailer but a dictatorial leader. He and Tom Vyner, deputy chairman and head of buying, ruled the company with a rod of iron.

Vyner, a small, slight man with large spectacles, was nicknamed 'the Rottweiler of Stamford Street' for his ferocious negotiating technique in the buyer/supplier arena, a sphere already characterised by crude bullying and resentment in the UK supermarket sector.

None of this was questioned as the group bestrode the grocery trade like a colossus. At this time Tesco was still a roughhouse competitor trading on Jack Cohen's market-stall philosophy of 'pile it high, sell it cheap', Safeway was a fraction of its current size, and Asda was never mentioned in the same breath as the mighty Sainsbury's, the out-and-out market leader. Sainsbury's was the unrivalled grocer to the middle classes, with smart high-street stores trading on the winning advertising slogan 'Good food costs less at Sainsbury's'.

But in this pre-eminence lay the seeds of the company's downfall. Market dominance led to management arrogance, allowing competitors to start chipping away at Sainsbury's territory.

By the late '80s, many of its stores were already trading close to other maximum sales densities. Already crowded and with queues at their tills, its most-successful outlets had become unable to cope with more customers.

Blinded by their success, management failed to notice that the market was changing around them. At Tesco, Ian (now Lord) MacLaurin had won a vital battle with Cohen to end the group's dependence on Green Shield stamps. With the energetic MacLaurin at the helm from 1977, Tesco embarked on a stunningly simple strategy - to be as good as Sainsbury's and beat them. By the 1980s Tesco was beginning to hit its stride. Planning permission for out-of-town stores was still relatively simple to obtain, and Tesco began a massive expansion, buying up prime sites for large stores and acquiring a land bank for future growth.

Sainsbury's, meanwhile, backed off and handed a crucial strategic advantage to its would-be competitors. 'If I had to point to where it all started to go wrong, that was it,' says one Sainsbury insider. 'When the government cracked down on out-of-town planning applications in the 1980s, Tesco had this huge pipeline of new stores.'

Sainsbury's high-handed attitude towards suppliers was also beginning to backfire. Tesco seized the chance to be different and adopted a more liberal attitude, offering to cooperate with suppliers on promotions.

This contrasted with the Sainsbury's approach of using its huge buying power to browbeat manufacturers into giving them good terms.

By 1992 Sainsbury's still had a seemingly unassailable lead over Tesco, but the figures masked key changes that were occurring in the market.

Sainsbury's still accounted for almost 12% of the UK grocery market against Tesco's 10%, but its growth was slowing. Tesco's was accelerating as it moved upmarket, stealing Sainsbury's clothes as the middle-class grocer while attracting a younger customer base. Asda was virtually crippled by debt, but had brought in a bright young chief executive from Kingfisher to help nurse the group to survival. His name was Archie Norman.

It was at this time that Sainsbury's appeared to take a step into the modern era with a management change. Lord Preston of Candover stepped down and handed the chairmanship to his cousin David, who had spent 17 years as finance director. The two could not have been more different. While Lord John was dictatorial and centralist, David was a more consensual manager. A shy, cerebral man whose hobbies included plant biology and cognitive neuroscience, David (now Lord) Sainsbury had used his huge wealth to help bankroll the SDP political party in the 1980s. He always seemed a reluctant grocer. Indeed, when asked in one interview what he would have done had he not been a Sainsbury, he replied: 'I think I would have been a scientific researcher, a teacher, or the founder of a small high-tech business making obscure things for people.' But to have spurned the opportunity to run the family firm would have been 'a bit wet', he said.

David Sainsbury tried to make changes but found the going tough. As one rival says: 'John was very autocratic. He didn't encourage people to make their own decisions and didn't build a good collection of managers. David was more of a team player but he didn't inherit a team.' David Sainsbury unlocked the chains of his managers but, lacking someone to tell them what to do, they floundered. No one had ever asked them to think for themselves.

City analysts compare the plight of Sainsbury's managers with those at M&S, another fallen giant, which, like Sainsbury's, had a long-term dictatorial leader in the bear-like figure of Sir Richard Greenbury. Both companies had rigid systems and were accustomed to 'their way' being successful.

But when the leader's touch failed, the management faithful didn't know what to do.

While David Sainsbury tried to enliven his troops, the competition was growing. By 1994 Tesco's market share was approaching that of Sainsbury's. Asda had rebuilt its fortunes on the platform of being the cheapest major supermarket. Tesco's MacLaurin had built a bright team of young managers that contrasted sharply with Sainsbury's board of tired, older heads. MacLaurin had even started to groom his successor in the young marketing director Terry Leahy.

The next two years were to prove crucial in the unravelling of Sainsbury's dominance of the sector as it was outflanked by Tesco in two key battles.

The first was the pounds 250 million bid battle for William Low, the small Scottish chain of supermarkets. Tesco launched a bid in 1994 that came as no surprise to the Low bosses, because MacLaurin had carefully built a relationship with the company. Sainsbury's joined the battle but, with no friendships to call on, was at a disadvantage. Reluctant to overpay for the prize, it allowed Low to fall to Tesco. 'Sainsbury's was bitter about losing out on that,' recalls one group insider. 'We only had a handful of stores in Scotland and were being blocked at every turn by Safeway, who were reported to be paying pounds 10 million to pounds 20 million for sites, just to make sure of getting them.'

Though Low's market share was small - only about 0.6% - it was of strategic significance. Tesco also had few stores north of the border so the deal made a good geographic fit. In the end it was probably worth almost a full percentage point of market share. By 1995, the unthinkable had happened.

Tesco overtook Sainsbury's as Britain's biggest grocer.

Far from fighting back, Sainsbury's management continued to ricochet from one strategic blunder to the next. In 1995, Tesco broke new ground with a loyalty card that enabled customers to collect points from their purchases that would qualify them for discounts and other special promotions. Called Clubcard, the scheme's central purpose was to tie shoppers in to Tesco while building a valuable database of shopping habits and spending patterns that could be exploited through direct marketing.

Unusually for Sainsbury's, it responded publicly to its rival, rubbishing the idea as a gimmick. Lord Sainsbury went as far as describing the cards as little more than 'electronic Green Shield stamps'. It was a remark that was to come back to haunt him. Sainsbury's launched its own reward card 15 months later.

The press barracked David Sainsbury for his humiliating U-turn, throwing the 'electronic stamps' remark back at him. But it can be revealed here that the phrase was not his idea. It was actually coined by Vyner. Uncharacteristically, the chairman was prompted to speak out.

From this point on, Tesco went on to trounce Sainsbury's with a string of marketing initiatives that often were laughed at initially, only to be copied later. It rolled out Tesco Metro, Tesco Express, 24-hour stores, and home shopping. Asda meanwhile had cleverly styled itself as the consumers' friend with Archie Norman fighting price battles on everything from bananas to medicines.

In early 1996, Sainsbury's reshuffled its board, with Dino Adriano moving up to chief executive and David Sainsbury becoming chairman. A Sainsbury's lifer, Adriano had joined the group in 1964 and spent most of his time in accountancy jobs before moving to Homebase in 1981. But he was not the new broom that had been hoped for by the City. Sainsbury's efforts to stimulate sales growth continued to look pedestrian. The integration of Texas Homecare, bought in 1995, proved complicated and contributed to a profits warning in early 1997. Its US supermarket businesses also failed to produce the anticipated returns. Its only coup was the launch of Sainsbury's Bank in 1996.

In a clear sign of panic, Sainsbury's kept changing strategy. It would pin its flag firmly to the mast of product quality, only to be sucked into price-cutting campaigns by rivals. It withdrew non-food ranges from stores saying they were too small, only to put them back later when Tesco started scoring big sales advances. 'What is their strategy?' asks one rival. 'They seem to change it every week.'

Adriano finally came clean last year, admitting that Sainsbury's had underinvested in its stores and that as a result three quarters of them were not up to scratch. He also started to wield the axe on Sainsbury's huge cost base. Some 1,100 jobs were cut at its main UK supermarket business, 350 went in the closure of the separate SavaCentre head office, 300 at the main HQ and a further 550 at Homebase.

But while Adriano turfed out staff, he and the group's new chairman, Sir George Bull were struggling to attract quality replacements. Bull left Diageo, the food and drinks group, in March 1998 to join the grocer as deputy chairman, taking over as chairman on David Sainsbury's departure that May. When Sainsbury's announced that Rosemary Thorne was to step down as finance director, it assumed it would be easy to attract a successor.

Several months later, the group had to go cap in hand to the disgruntled Thorne and ask her to stay on (she finally left in November 1999). Tellingly, the company has reshuffled some of its advisers - the so-called 'shooting the messenger' syndrome and often a sign of a company in trouble. The advertising agency Abbott Mead Vickers, a partner for many years and close both to David Sainsbury and Davis, was canned after the failure of the disastrous 'Value to shout about' campaign, starring John Cleese. Financial PR firm The Maitland Consultancy resigned and was replaced by Brunswick.

Another management reshuffle, which followed a further slide in sales in October, again underwhelmed the City. Adriano remained as group chief executive, with Bremner promoted to head the core UK supermarket business. Analysts were left shaking their heads.

'This looks like rearranging the deck chairs on the Titanic,' one remarked.

Indeed, the plan lasted only three months.

Bremner, 42, will remain in place under Davis. The deputy chief executive is a man of ambition and ability. His supporters point to his energy and ideas, and his understanding of the business - again, he has spent most of his working life within the Sainsbury's fold. Critics, however, point to his spell outside as chief executive of Watson & Philip, the convenience store outfit. He left there three years ago, but the near collapse of the group, now called Alldays, leaves a worrying blot on his CV.

The final straw for Adriano came in January with the announcement of more disappointing figures. Only four months previously he had claimed he was on track to hit his target. His departure this spring will be softened by a pounds 1-million payoff.

The City will be impatient for change, as it always is. This is a company whose shares have underperformed the stock market by 50% over the past five years. And analysts will be looking for evidence of a fresh approach to revitalise the group's share price and trading performance. So will Davis, with his strong track record as a marketer, as well as in the City.

Cassandras should not underestimate the power of the Sainsbury's brand. To some consumers, it remains top of the pile for food quality and one of retail's most trusted names. 'To put its financial 'crisis' into perspective, this is still a company that achieves annual sales of pounds 16 billion and profits of pounds 700 million. It is not exactly going bust,' says one supporter.

The statement that accompanied the announcement of Davis' appointment contained a ringing endorsement of the decision not only from the Sainsbury family but also from Portrait. They will have to bide their time to give Davis a chance of working some magic. If consolidation proves necessary Davis' friends in government will be able to have a quiet word in the ear of bureaucrats at the Competition Commission.

1869: John James and Mary Ann Sainsbury open the first Sainsbury's shop on London's Drury Lane selling dairy products like butter, milk and eggs

1873: Second shop opens in Kentish Town, north London

1880s: Stores open in Croydon, Balham and Lewisham selling a wider range of goods such as cooked meats

1915: John and Ann's eldest son John Benjamin joins the partnership

1936: Sainsbury's buys the Thoroughgood chain and expands into the Midlands 1967: Mr Alan, grandson of the founder, steps down from chairmanship

1969: Mr RJ retires as chairman and becomes a life president

1973: J Sainsbury floats on London Stock Exchange

1977: First Savacentre opens in Washington, Tyne and Wear

1981: Homebase opens in Croydon

1987: Buys Shaw's Supermarkets in US

1992: Lord Sainsbury of Preston Candover steps down as chairman after 23 years. Becomes life president

1992: His cousin David Sainsbury takes over

1994: Loses bid battle for William Low to Tesco

Feb 1995: Tesco launches its Clubcard. David Sainsbury dismisses the idea as 'electronic Green Shield Stamps'

1995: Buys Texas Homecare. Tesco leads Sainsbury's in market share for the first time

1996: Sainsbury's issues profit warning. Announces first fall in profits for 22 years; launches loyalty card Oct 1996: launch of Sainsbury's bank

March 1998: Dino Adriano becomes group chief executive

May 1998: David (Lord) Sainsbury steps down as chairman to become a government minister, replaced by George Bull

June 1999: Wal-Mart launches pounds 6.7 billion takeover of Asda

June 1999: Sir Tim Sainsbury steps down - the company is without a family member on the board for the first time

July 1999: Announces plan to open 1,000 convenience stores called Sainsbury's Local

Dec 1999: Sale of family stake, a 30% holding worth some pounds 2 billion, mooted after the appointment of Dresdner Kleinwort Benson as advisers

Jan 2000: Sir Peter Davis, tempted by pounds 12.9 million package, agrees to replace Adriano as chief executive.

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