Sainsbury's profits slump sparks plan for 'aggression'

Sainsbury's announced its first profits fall in its 22 years as a public company yesterday, but pledged to improve its performance with the launch of a loyalty card, a credit card and a host of "more aggressive" marketing campaigns.

Announcing a 5.4 per cent fall in pre-exceptional profits to pounds 764m, chairman David Sainsbury said: "It has been a very competitive environment and we have been hindered by a smaller store-opening programme. But nevertheless we don't think it has been a satisfactory performance. We haven't done as well as we should."

He admitted Sainsbury had "lost the marketing battle" to rivals Tesco and Asda, which have gained market share with a series of price campaigns and, in Tesco's case, a highly successful loyalty card. He denied Sainsbury's had become complacent. Sainsbury's is to launch its own loyalty card in the next two months. It is also working on a credit card with a view to offering other financial services.

Although Sainsbury's has released few details, it says the card will be cheaper to operate than Tesco's ClubCard and will not involve the quarterly mail out of discount vouchers. Kevin McCarten, the marketing director, who joined the company in December, said the initial card would be "fairly simple" but that other features would be "layered on to it" at a later date.

Sainsbury's shares rose 15p to 372p as the company increased the dividend by 3.4 per cent to 12.1p and promised a more progressive dividend policy which will see the dividend rise by an average of 3 per cent above earnings growth "for the foreseeable future".

The group's malaise had forced the company to under-take a four-month review of its operations, which had constituted the most thorough examination in its 126-year history. "There were no sacred cows," Mr McCarten said.

As a result it has conceived a four-point strategy it hopes will help restore its market share and revive its flagging sales volumes. These programmes focus on delivering better quality and choice, better value for money, improved customer service and new customer loyalty programmes.

The strategy did not impress City analysts. Tony MacNeary of NatWest said: "I'm not impressed by these four bullet points which are backed with very little detail. I'm bemused by the rise in the share price. People think that it's all going to turn out hunky dory. But I just don't see it."

The company said it hoped to shift the balance of its marketing more towards quality, choice and customer service than price, although price campaigns would still continue.

Sainsbury's has also completed the management re-shuffle, which started in January when David Sainsbury split the roles of chairman and chief executive, handing over the running of the UK supermarkets to Dino Adriano. The other chief executive post was filled yesterday when the company named David Bremner as its chief executive for new businesses, which include the DIY businesses Homebase and Texas Homecare as well as the US interests, which include Shaw's and the 16 per cent stake in Giant Foods.

Mr Bremner, 38, is currently chief executive of Watson & Philip, the Dundee wholesale group. Prior to that he worked at Sainsbury's for 11 years.

Kevin McCarten has already joined as marketing director from Kingfisher. Last week Sainsbury appointed Dominic Fry as corporate communications director. He joins from Eurotunnel in the summer.

Although Sainsbury's pre-exceptional profits were only down 5.4 per cent to pounds 764m, the pre-tax figure slumped from pounds 809m to pounds 712m due to a pounds 48m provision to cover the more rapid conversion programme of the acquired Texas Homecare DIY stores into the Sainsbury Homebase format. Losses at Texas Homecare totalled pounds 10m last year.

Group sales were 12 per cent higher at pounds 13.5bn. The most worrying trend was the 5.1 per cent fall in operating profits in the core UK supermarkets business to pounds 744m. Although sales increased by 2.6 per cent on a like- for-like basis this failed to keep pace with food price inflation of 4.5 per cent.

Profits were hit by improved customer service measures, price campaigns and "inefficient marketing". Like-for-like sales have risen by 3 per cent since the year end although the petrol price war has continued to hurt and could cost pounds 10m-pounds 20m this year.

The operating margin declined from 8.2 per cent to 7.3 per cent last year and David Sainsbury warned that he did not foresee a recovery in the margins this year.

Analysts have cut their forecasts for the current year. NatWest Securities has downgraded from pounds 797m to pounds 780m. SG Warburg also cut to pounds 796m.

Paul Vallely, page 13

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