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January 29, 2014

On the move: Sainsbury’s hopes for smooth transition as King bows out

UK retailer Sainsbury's announced this morning (29 January) that chief executive Justin King will leave the company after ten fruitful years at the helm. In his successor, commercial director Mike Coupe, Sainsbury's appears to be looking for a smooth transition - and more of the same on the strategy front. Katy Askew reports.

UK retailer Sainsbury’s announced this morning (29 January) that chief executive Justin King will leave the company after ten fruitful years at the helm. In his successor, commercial director Mike Coupe, Sainsbury’s appears to be looking for a smooth transition – and more of the same on the strategy front. Katy Askew reports.

Justin King is one of the more charismatic players on the UK retail scene. In his ten years as chief executive of Sainsbury’s he has overseen a highly successful turnaround strategy, which has aimed to “make Sainsbury’s great again”.

Until the mid-1990s, Sainsbury’s had enjoyed pole position in the UK as the country’s largest supermarket group. However, the firm was hit by a decade of decline which saw now larger rival Tesco on the front foot.

Tesco was outperforming Sainsbury’s on all fronts: it offered strong branding and a clear identity, it was at the forefront of private label development and its value-message was striking a note with consumers who had been hardened by the early-90s recession. In contrast, Sainsbury’s was plagued by operational difficulties and – in stores all over the country – it was struggling with issues as simple as stock management, with empty shelves commonplace.

Ah, how the worm has turned.

Today, Sainsbury’s is outperforming the other multiples and stealing market share in what remains a fiercely competitive environment. Sainsbury’s has been clawing back market share from its larger rivals – Tesco and Asda – who have been more prone to the threat of the German discounters. According to the latest data from Kantar Worldpanel, in the 12 weeks to 5 January Sainsbury’s was able to grow sales while others declined, meaning that its market share now matches that of Asda, the country’s second largest supermarket.

When he was appointed CEO back in 2004, there was a degree of scepticism in the market over whether King was the right man for the job. Although he came from heading up Marks and Spencer’s food business, his marketing-heavy background did not leave him well-placed to tackle the group’s significant operational failings, detractors argued. Nevertheless, with a clear mandate to reverse Sainsbury’s decline, over the past ten years King has certainly proved his metal.

The group has fixed its back-end problems while also reducing costs – Sainsbury’s has got the basics of retail right.

The group has expanded its store count. According to data from IGD Retail Analysis, Sainsbury’s has increased its number of supermarkets by one-third – the company now operates 595 supermarkets in the UK – and bulked up in the faster-growing convenience sector. The company now operates 354% more convenience stores than it did in 2004, IGD says. Sainsbury’s has also expanded online and this channel now represents the fastest growing area of Sainsbury’s sales.

Sainsbury’s has strengthened its brand through the Nectar loyalty scheme and its private label offering. It has developed its tiered private label system, which it now leverages as a real point of difference.

Significantly, the company has remained focused on providing quality and ethically sourced private label products, insisting that value is about more than price. Sainsbury’s did much to undermine the perception that own label is a cheap – but worse quality – alternative to brands through the Brand Match campaign, when it pitted its own label products against branded products.

As chief executive, King has been quick to embrace new consumer trends. In the recent downturn, UK grocery volumes have come under pressure as consumers cut food waste to keep a lid on bills. King’s answer has been to embrace the shift, supporting consumers through savvy initiatives such as “love your leftovers”. Perhaps here, King’s marketing expertise is in most evidence.

The result of these strategies has been a massive jump in sales and profits. Between fiscal 2003/4 and fiscal 2013/14, Sainsbury’s has seen a 67% increase in turnover and 59% jump in operating profit, IGD calculates.

“Mr King deserves considerable credit, in our view, in the way that he has delivered a stabilisation, recovery and solid growth at Sainsbury’s, albeit the initial rebasing of margin when he arrived was considerable. Perhaps his greatest achievement, to our minds, is that he steered Sainsbury’s to consistent market share gains involving sustained positive like-for-like sales growth through a deep consumer recession and materially broadened the reach of Sainsbury’s brand in the United Kingdom,” Shore Capital analyst Clive Black reflects.

King is going out on a high and his departure – while well-flagged in the media – will likely come as a disappointment to stakeholders and employees alike.

Charged with filling King’s shoes is current commercial director Mike Coupe.

Coupe is a solid appointment. A veteran of the retail scene, he has long been tipped as King’s likely successor. He joined Sainsbury’s as trading director in 2004 from the then-owner of Iceland Food stores, Big Food Group. Prior to that he worked for both Asda and Tesco, where he served in a variety of senior management roles. He was appointed to his current role in July 2010.

“No one knows Sainsbury’s – or the industry – better than Mike. He has worked hand-in-hand with Justin over the past decade and has a proven track record of success making him the natural choice to take the company forward,” Sainsbury’s chairman David Tyler comments.

In Coupe, it is likely that the Sainsbury’s board were looking for a candidate that could deliver a smooth transition and strategic continuity and his appointment has been warmly received.

“It very much appears to have been planned so as to be as seamless a transition as possible,” Conlumino analyst Joseph Robinson says.

According to Bruno Monteyne, an analyst with Bernstein, as commercial director Coupe presided over “a great treading success story”. Monteyne believes that Coupe is a “great choice” for CEO.

“He has clearly been groomed for the role, being at all analyst meetings, being COO for a while to get a better feel for the operations. This is a safe pair of hands and a good source of stability for the company. This isn’t a rocket-science business and this isn’t a company in trouble. Sainsbury’s doesn’t need a rock-star CEO from abroad to fly in. So Mike Coupe sounds like a great choice,” he tells just-food.

But is strategic continuity going to be enough to maintain Sainsbury’s sales momentum? Certainly, Sainsbury’s current strategy is delivering dividends, but the group is facing some new challenges that could present strategic stumbling blocks.

The company has slowed its capital intensive store opening programme – meaning that the sales uplift delivered by new stores has trailed off. Like-for-like sales growth will therefore be essential if Sainsbury’s is to continue winning share.

It is also facing the stirrings of stiffer competition in the UK. Tesco, which for so long had been focused on empire building overseas, has re-focused on its UK business. Any benefit from Tesco’s attempts to grow UK sales – from relaunching its private label lines to refurbishing its stores – have been slow to be realised. However, the UK retail goliath remains a force to be reckoned with and it is too early to write off its UK turnaround efforts.

In this context, ‘more of the same’ might not be enough to keep Sainsbury’s on the up. Coupe could well look to develop his own dynamic plans to keep Sainsbury’s relevant and broaden its customer appeal.

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