Sainsbury and reward for failure

THE brutal dismissal of the ebullient chairman of J Sainsbury, after a bitter row with shareholders over pay, brings to an abrupt end the relationship between Sir Peter Davis and the Sainsbury family.

Davis was parachuted into the company four and a half years ago to stop the rot which had seen Britain's most popular grocer overtaken first by the upstart Tesco and latterly by American-owned Asda. It now trails a poor third among supermarkets.

To tempt a man seen as a marketing genius across from the mighty Prudential, where he was chief executive, the Sainsbury family came up with what was then one of the most generous pay packages in British corporate history.

His pay was made up of a good salary, a guaranteed bonus, irrespective of performance and he was handed a package of shares which at the time was valued at £11.8m.

But instead of turning Sainsbury back into the nation's top supermarkets group he found himself falling further behind a surging Tesco.

A decade ago Sainsbury led the pack with an 18.2% share of the market against 16.3% at Tesco. Now Tesco has 26.8% and Sainsbury is down to 16.8%.

In the last year alone Sainsbury's store sales fell one% as Tesco soared 11% and Asda, owned by Wal-Mart, climbed 8%.

Despite the lacklustre performance, which has seen the share price plunge below where it was when Davis joined, the chairman insisted on being paid in full.

To add insult to injury, his final award of shares worth £2.4m came at a time when his new chief executive Justin King - hauled in from Marks & Spencer's food operation - was writing to the company's 145,000 workers telling them that the Christmas bonus, a Sainsbury family tradition, was to be axed.

The final straw for investors was the failure of Sainsbury's pay committee, led by Lord Levene, to persuade Davis to accept a pay cut or give his bonus to charity.

In a repetition of the events at ITV late last year, independent shareholders led by the insurer Legal & General decided they had had enough.

The board, regarded as weak in the City, relented and tipped Davis overboard, immediately replacing him with the high powered financial expert Philip Hampton.

As the man responsible for breaking up British Gas and cleaning up the balance sheet of British Telecom, Hampton is seen as a great catch.

The shareholder activism at Sainsbury caught everyone by surprise. The Sainsbury family, through blind and other family trusts, control up to 38% of the shares, and Davis was their man.

It is my understanding that they have been satisfied with his strategy and had put no pressure on him to go. What the chairman clearly did not understand was the level of dissatisfaction among the other City investors.

One of the biggest told me that the firm's decline dates back to the mid-1990s when Lord (David) Sainsbury, now Science Minister, was running the company himself.

The shareholder expressed anger that the Minister now lectures the City on corporate governance, when his own family have indirectly presided over the group's slide.

Indeed, it was only a few months ago that Philip Green, the Bhs and Top Shop owner now stalking Marks & Spencer, approached Sainsbury about a possible takeover at a considerable premium to the share price.

Green was sent away with a flea in his ear and a message that he should remember 'whose' name is over the door.

Davis, who was due to make way for a successor in a year, might well have survived had his strategy worked.

He moved over the last four years to simplify the business by selling off Homebase and its American store chain Shaw's and ploughed £ 3bn of shareholders' money into new warehousing, headquarters and updated stores. Unfortunately for him, the changes have not worked.

Moreover, there have been a series of embarrasing swerves, with the company finding it difficult to decide whether it is a value grocer, competing with Tesco, or a quality provider trying to take sales off Waitrose and M&S. We now know that Davis's strategy has failed.

As important as the blood on the boardroom floor is the disclosure that profits will fall far short of what was expected.

It was this which led to a precipitate fall in the company's share price when the stock market opened yesterday. Profits this year are now expected to be £400m against previous projections of over £500m.

King faces a massive task. He will focus closely on grocery, with a firesale of other goods from TVs to barbecues, seek to make the new warehouse system pay its way and will almost certainly have to write off stock and equipment.

There is a belief in the City that Hampton's role will be to fatten up the company to sell it on. But in the end the new management team of King and Hampton will have to deal with David Sainsbury and the huge family holding.

In their hands lies the ultimate solution to J Sainsbury's future.