SAINSBURY SHELVES U.S. EXPANSION; SHAW'S STAYS

JAMES FALLON

LONDON -- J. Sainsbury plc here is keeping its Shaw's Supermarkets subsidiary in East Bridgewater, Mass. -- at least for now. And don't expect many more Sainsbury acquisitions in the United States.

Sir Peter Davis, the new chief executive of the British food retailer, said Sainsbury has no plans to sell Shaw's despite continuing speculation it might do so. But it does not see the need to become a major player in the U.S. market.

"Shaw's is a good business that's performing well and has a strong management team," he said. "But you can forget about $10 billion for our U.S. business. We are not a U.S. consolidator but we are a strong regional player. There are enormous inter-group synergies in having Shaw's but we don't see the need to be an industry consolidator."

Davis revealed the about-face in the United States as Shaw's reported a 46% increase in operating profits to $128.9 million on a 25.7% rise in sales to $3.86 billion for the year ended April 1.

The figures include Star Markets, which Sainsbury acquired last year. Star Markets contributed $7.6 million to Shaw's operating profits before exceptional costs and amortization. On a same-store basis, Shaw's sales rose 3.1%, including Star Markets.

The new American strategy represents only one of the many changes Davis has begun implementing since he took over from Dino Adriano, Sainsbury's former chief executive, three months ago. Adriano and David Bremner, the Sainsbury director responsible for Shaw's who left after Davis arrived, projected the group would have sales in the United States of about $10 billion by the year 2005. In their view, there were still many family-owned chains in the Northeastern United States that Shaw's could buy to expand beyond its core operating area of New England. Adriano and Bremner predicted that Shaw's eventually would be a major player throughout the Northeast.

Part of the reason for Sainsbury's change in attitude is the continuing lackluster performance of its core U.K. supermarket operations. The Sainsbury division reported a 28.7% drop in operating profits to $782.7 million from $1.09 billion on a 1.8% rise in sales to $19.9 billion last year from $19.55 billion a year earlier. Same-store sales rose only 0.5% during the year, including a 1.4% increase in the second half following a 0.9% decline in the first six months.

The same-store figures are in contrast to those of Sainsbury's competitors,Tesco plc and Asda, the subsidiary of Wal-Mart Stores Inc. These companies have been registering same-store sales growth of more than 3%.

Davis said his priority is to reverse the company's performance in the United Kingdom, where it suffers from declining monthly profitability, rising costs, poor employee morale and declining customer satisfaction. Sainsbury has under-invested substantially in the United Kingdom and, as a result, the quality of its stores and supply chain lag those of even some of its smaller competitors, analysts say.

The new chief executive plans to ramp up Sainsbury's capital expenditure to $1.35 billion from an originally projected $1.2 billion. He did not detail where the investment will go, but indicated a large proportion will be spent on refurbishing and extending existing stores and improving logistics operations. Sainsbury currently is undertaking a review of its pricing strategy and Davis plans to refocus the company on value rather than price.

Sainsbury also will invest $90 million in e-commerce activities this year, Davis said. The investment includes a change in strategy toward home shopping. Sainsbury originally planned to fulfill home-shopping orders from a series of picking warehouses, the first of which will open near London in July. It will continue with this strategy but now also will fulfill orders from its stores, especially outside London, Davis said. The company hopes to have coverage of about 60% of the United Kingdom by the end of the year. This compares with the almost 100% that Tesco plans to have by that time.

"It's a huge step up from where we are today," Davis said. "It also will give us the flexibility to accelerate or decelerate as we learn more about it and to establish a demand before a decision on whether to invest in a picking center."

In addition to the home-shopping service, Sainsbury is launching a food and drink Internet portal called TasteforLife that initially will focus on recipes and information about food, wine and organic foods. Sainsbury recently signed a preliminary agreement with the British media group Carlton Communications plc to form a joint venture in digital television and the Internet. Following completion of the deal, Sainsbury would fold TasteforLife into the venture as well as its home-shopping service, SainsburysToYou. Carlton would use its media assets, SimplyFood and the Carlton Food Network, to promote and sell e-commerce services in food and drink.

Overall, the group reported a 41.8% drop in profits after taxes and exceptional items to $520.5 million on a 1% fall in sales to $26.12 billion for the year ended April 1. This compares with profits after taxes and exceptional items of $894 million on sales of $26.38 billion a year earlier. Exceptional charges last year totaled $49.5 million, including a $22.5 million loss on the sale of 19 shopping centers owned by Shaw's.