The grocer who says this year will test retailers as well as shoppers

Much like the rest of the country, the chief executive of the country’s third largest supermarket group is trying to make up his mind about the coalition government.

At the start of the election campaign Sainsbury’s boss Justin King was one of many who backed Tory plans to scrap national insurance hikes for employers, a policy widely dismissed as a tax on jobs. He seems set to get his wish on this.

But as part of the new government’s drive to tackle the country’s cripplingly large £156bn budget deficit, Vat is expected to rise from 17.5 per cent to as high as 20 per cent; items that are currently subjected to lower or even zero rates (such as unprocessed food and children’s clothes) could also be hit harder. We will know more after George Osborne’s emergency budget on 22 June –?but this is a subject that King understandably has strong views about. He concedes that Vat may have to rise but believes that it shouldn’t be extended to zero-rated items

“We can’t be naysayers to everything the government does,” says a lean, tanned King. “The government is clearly grappling with very significant challenges as regards the national deficit.” He continues: “On Vat, I would say taxing food would be hugely regressive, because that would hit the poorest hardest. It would also go against government policies on healthy eating. If a rise is to come we would like plenty of notice. And for it to fall at a sensible time of the year, not at a busy period like Christmas.”

King is sitting on his favourite black leather sofa in a third floor meeting room near his desk in the corporate services department at the company’s Holborn headquarters. The office outside neatly reflects King ?– busy, modern, informal. As you walk through the department impromptu meetings seem to be happening at every other desk.

However, King is in no doubt that the FTSE 100 business, with a market value of £6bn, and his millions of consumers, are going to be tested for at least the next year or so. He says: “The numbers don’t tell the whole story. Economists might tell us we have come out of recession but the direction of travel does not feel entirely positive. There is uncertainty about the coalition government. Many people are saying ‘let’s suck it and see.’ Everyone knows what’s coming. Taxes are going up and government spending is going down.”

King adds: “People who are still in employment, and that is by far the majority, have money in their pockets, but they are keen to hold on to it because they know tough times are ahead. It is up to us as retailers to offer the best value for money to keep our share of the market.”

But so far King has been more than able to hold his own in the highly competitive UK grocery and clothing market. In fact, he is doing remarkably well, which perhaps helps to explain why he looks much more relaxed than a year or so ago when City A.M. last went to interview him. Last month, Sainsbury’s beat forecasts when it posted a £610m full-year pre-tax profit, up 17.5 per cent from a year ago. Like-for-like sales rose a healthy 4.3 per cent, and the firm’s 127,000 workers shared an £80m bonus.

The chain, which runs over 870 stores, said 19m shoppers a week used its stores, a million more than 12 months ago. This is a very different firm to when King took the top job in 2004, leaving Marks & Spencer where he was head of food. At the time, after a bungled stab at international expansion and a disastrous new supply chain system, Sainsbury’s had lost market share for 14 years in a row, while Tesco had grown rapidly at home and abroad – stealing its rival’s crown as the country’s biggest grocer in the mid-1990s.

The City thought King was a strong contender to rejoin Marks & Spencer this year to replace Sir Stuart Rose as chief executive, though he always said he has much to do at Sainsbury’s. That job eventually went to Morrisons’ boss Marc Bolland.

Sainsbury’s is currently halfway through a two-year expansion programme, and these annual results would seem to bear out the wisdom of the thinking of King and his team. Last June the business raised £400m through an equity placing and a convertible bond, which helped the chain add 1.2m sq ft of new space, including 50 convenience stores and 20 supermarkets.

King says: “We are in good financial shape, and last summer we saw there was perhaps a once in a lifetime opportunity to grow our stores at great pace.” He adds: “We have never added more than a 1m sq ft before. Not even in our pomp in the 1980s, when we were perhaps the biggest supermarket growth story in the world were we able add that much space in a single year.”

By next summer, the supermarket plans to expand its estate by 2.5m sq ft, or 15 per cent. A third of this growth will come from convenience stores, the fastest growing area in the grocery market. Another third will come from extending existing stores, and the final segment will come from building new supermarkets.

The business has a 16.1 per cent share of the market, but for historic reasons Sainsbury’s has a greater concentration in the southeast, while in the north its market share drops to around 10 per cent. King says he plans to build or extend a succession of new stores in northern market towns beyond this current two-year building programme for some time to come.

King is also keen that Sainsbury’s plays its part in the community, and points out that a number of his stores include policing centres that cover the local area. He says: “Decay brings its own problems. In some areas people are afraid to come out in the evening, let alone shop. We want to play our part in making the areas that surround our stores safer.”

As King expands his estate he is also keen to boost the number of higher margin, non-food items he fills the shelves with. Around 10 per cent of Sainsbury’s sales are non-food, while Tesco has 20 per cent non-food revenues. He says: “Both Tesco and Asda are relatively twice our size when it comes to non -food sales. This is something we are looking at.”

King says that in new, larger stores a third of the floor space will be given over to non-food items like soft furnishings, electrical goods and clothing. He adds that non-food is growing at three times the rate of food sales. The firm’s Tu kids clothing range has grown from sales of £50m to £500m in five years, making it the seventh largest kids’ clothes retailer in the country.

King is also happy with the progress of Sainsbury’s Bank, a joint venture with Lloyds Banking Group. It has 1.5m customers and made an £18m profit last year. The bank –?which has appointed David Fisher as its boss – offers loans, saving products, insurance and travel exchange. But King says he has no plans to sell complex services like mortgages or offer current accounts. He says: “At the moment these are the types of products our customers feel comfortable buying from us.” The market will look with interest at Tesco, which is buying control of its own joint venture, to see if it will offer a full banking service.

Last month Sainsbury’s withdrew its corporate ratings from Moody’s and Standard & Poor’s. King says this is the culmination of a four-year strategy to borrow against its property portfolio rather than use unsecured debt.

He adds that the Qatari Investment Authority, which owns 27 per cent of the business and in 2007 tried to buy the firm, also seems happy to remain a long-term investor. He says: “We have a very large shareholder. They have told us they love the company, and love the strategy. And they want to invest over the long term, and so far they have proved to be very supportive.”

Perhaps this is because King has so far notched up an impressive 21 consecutive quarters of growth, a record that should be enough to make any investor supportive. Shareholders will be hoping he can continue to deliver such high-quality goods.


Age: 48

Work: 1983: joined Mars as a graduate trainee; 1989: Joined Pepsi and worked in Egypt and other parts of the Middle East; 1990: Joined Haagen-Dazs, where he became managing director of the UK business; 1993: Joined Asda, where he held a number of senior positions; 2000: Appointed head of Marks & Spencer’s food division; 2004: Joined J Sainsbury as chief executive

Education: Tudor Grange grammar school in Solihull and Bath University

Family: Married with two children

Lives: A house in Leamington Spa and a flat in Bloomsbury, London