How long will King continue to do the business at Sainsbury's?

It could be said that Sainsbury's has been leading something of a charmed life this past year or so as it was expected to take a beating from the trading down by consumers. It had been predicted that its focus on food rather than on price would cause its downfall.

By Glynn Davis, City editor

Some decent marketing, involving messages about feeding your family for a fiver and using leftovers, has enabled the company to avoid such a collapse. This perception of frugality seems to have been more than sufficient for Sainsbury's to navigate the downturn whereas others have found it much more problematic.

Tesco caused some waves by launching its Discounter range and although this is selling well its lower pricing has contributed to the grocer reporting slowing growth over recent months. For the four weeks to February 22 its sales increased 5.2 per cent, which compares with a much more impressive 7.1 per cent for Sainsbury's. Other food retailers have also suffered with Waitrose up a lowly 2.3 per cent and Marks & Spencer down 3.1 per cent.

There is little doubt that Sainsbury's has taken market share from the latter two as its food credentials make it an acceptable trade-down from the more upmarket Waitrose and M&S. Such has been the effect of more price-focused shopping on Waitrose's trade that it is launching its own low-cost 'Essentials' range.

Such drastic action has clearly been unnecessary at Sainsbury's and the company's decent trading has even given it sufficient confidence to even talk up some of the more peripheral elements of its business - such as its convenience stores.

Whereas M&S has been under pressure by certain City analysts to close down or sell-off its small format Simply Food division Sainsbury's is pushing ahead with growing its base of compact stores. The company is just about to embark on the roll out of a new style of convenience store with the intention of having at least 100 outlets by 2010.

This is part of a broad effort to improve the company's convenience stores business following the decision by chief executive Justin King that it should either be a bigger part of Sainsbury's total group sales or not be part of the business at all. At the rate of growth that is planned the small stores could soon grow from 10 per cent of group sales to nearer 25 per cent.

This represents a very different strategy to that employed by Asda as its management has perennially rubbished the contribution that even a large chain of convenience stores could make when compared with adding just a few large superstores.

But this won't worry King because having proved the doubters wrong so far about the resilience of Sainsbury's in the downturn he is probably not short on confidence. For shareholders, however, the concern must be that growth for the foreseeable future is now factored into the Sainsbury's share price.

Having moved up from a 12-month low of 236.5p in October they now stand at 319p, which puts them on a PE of 16x this year's earnings, and at a premium to rival Tesco. This concerns some analysts who point to the larger grocer's international operations as a big driver of future growth whereas Sainsbury's is wholly wedded to the peaks and troughs of the domestic market.

The other concern must be that King decides to call it a day at Sainsbury's. His name has already been linked to the top spot at M&S, which would see him return to his previous employer in a move mirroring that of the incumbent chief executive Stuart Rose.

Such a move would see King depart while the going is still pretty good at Sainsbury's. He only has to ask Rose about how things can appear to be going smoothly but then turn sour very quickly.

glynnd@theretailbulletin.com