Kamcity Library - Managing Sainsbury’s while you wait…

Essentially, option one is to accept the Qatari bid, leading to a classic ‘private equity’ situation where a heavily leveraged purchase has to result in sale and leaseback of the estate in order to pay down the debt. The company will then have to pay rent, thus reducing its already thin trading margins. Even in the short period since the bid was announced, the private equity market has peaked because of pressure on lending for buyouts, resulting in even more pressure on the company to achieve acceptable levels of financial KPI performance. Demands for guarantees by the Sainsbury’s pension trustees will add extra pressure. Given the competitiveness of the UK market it is unlikely that acquired Sainsbury’s will be able to devote sufficient resource to Qatari’s stated intention of driving overseas expansion.

Option two is to refuse the offer because of lack of transparency regarding the nature of the funding, queries as to the necessity for high gearing, the need for sale and leaseback and uncertainty as to the nature of the management structure following takeover. In such uncertain situations, the good guys are usually the first to leave, and this would thereby expose the relative lack of retailing experience in the current Qatari team. A consequence of refusal will be that the share price will fall; pressure will once again focus upon increasing ROCE. This would drive attempts to increase net margins to match the positive results already achieved in terms of like-for-like sales increases and stock rotation.

Unfortunately, as it is unlikely that suppliers will reduce cost prices or that the market will permit increases in shelf prices, an independent Sainsbury’s deciding to go it alone will be forced to buy time in the short term by selling and leasing back significant parts of the estate in order to return cash to shareholders. This will compromise the bottom line via the need to pay rental charges, thus causing them to adopt other ‘private equity’ moves in terms of reorganising cashflows (credit taken, reduced stockholding) make requests for increased trade funding, whilst providing guarantees to the pension fund, and cutting costs on an ongoing basis. In addition, the management team would require an increased stake in the company to help to focus their minds on financial output…and all of this in an increasingly hostile market environment.

Meanwhile, suppliers need a strategy for managing Sainsbury’s in the early stages as it makes its decision to either accept the existing offer, or to go it alone. Either way, suppliers cannot afford to ignore business development opportunities as they await a final outcome and its necessary period of adjustment. In other words, suppliers need to find a way of optimising the potential of their Sainsbury’s business over the coming six months.

Essentially, this means reverting to the short term in all dealings with the company. In other words, concentrating upon selling more of the current products to current users in Sainsbury’s store traffic. Any other strategy will involve investment by suppliers, with little guarantee of payback, given the strength of other customers operating successfully and strategically in the same market.

Sainsbury’s need the support of good trade partners in order to assist in damage limitation over the coming months, and suppliers certainly cannot afford further concentration of trade. However, if Sainsbury’s current dilemma is allowed to continue unresolved into the New Year, the resulting damage may be terminal….

For KamTips on 'Managing a Customer in the Short Term' see Namnews – August 2007

Date article published: 08/2007

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