SAINSBURY MAPS COST-SAVINGS STRATEGY

JAMES FALLON

LONDON (FNS) -- J. Sainsbury plc here last week outlined further restructuring moves aimed at delivering cost-savings of $870 million a year by 2004.

The moves are part of the program being implemented by Sainsbury's group chief executive Sir Peter Davis aimed at revitalizing the U.K.'s second-largest food retailer. Sainsbury's growth has lagged that of its rivals Tesco plc, Cheshunt, England, and Asda, the Leeds-based subsidiary of Wal-Mart.

Davis, who joined Sainsbury's in March, told analysts last week that his goal was to return the group's core U.K. food retail operations to "margins that will compare with the best in the industry." Davis did not provide details, but analysts said that would mean Sainsbury's would have to increase its margins to about 6% from their current 4% and from the 3.3% it achieved in the year ending March 31.

One way the retailer plans to do this is to increase its sales of fresh and prepared foods. Sainsbury's, previously a market leader in those categories, has lost out over the last few years to rivals like Tesco and Marks & Spencer plc. Davis said last week the company has significantly increased its investment in new product development over the last six months and expects to continue to do so next year.

Sainsbury's will introduce its "Taste the Difference" range of 350 products in November and next year will increase the space it devotes in its stores to fresh and chilled products, Davis said. Sainsbury's stores tend to be smaller than those of its rivals and Davis said the additional space for fresh and chilled products will come through better display techniques for grocery and non-food products.

The program of cost savings also is aimed at delivering same-store sales growth, Davis said, which should contribute to the improved operating margins and enable Sainsbury's to invest in better customer services. Of the projected savings, half would come through better operating procedures and the remainder from better buying practices, including greater use of the Internet for sourcing through Sainsbury's involvement in GlobalNetXchange.

A significant portion of the savings would be re-invested in lower prices and an increased capital investment program to refurbish Sainsbury's aging store portfolio. The company expects to increase capital expenditure by about $217.5 million to $290 million a year over the next three years, Davis said. Sainsbury's capital investment totaled $1.16 billion in the year ending March 31.

Part of the investment also will go toward the rollout of Sainsbury's e-commerce operation "Sainsbury's To You." The company expects the service to cover 60% of the U.K. by April 2001, Davis said. Sainsbury's has revised its original strategy on e-commerce, which was focused on fulfilling orders through dedicated picking centers. The retailer now plans to fulfill orders through a combination of in-store picking in 33 of its stores and from two dedicated centers in the U.K. Sainsbury's also plans to launch soon a strategic partnership with Carlton Communications, which will create the first interactive food shopping channel in Britain, Davis said.

"We are quite clear about the scale of change needed in our core supermarkets business," Davis told analysts. "This update today demonstrates the radical program we have put in place to transform the business over the next three years."