Sainsbury on the long haul back

WHAT do Sainsbury's results today tell us? If nothing else, they are further evidence of the turmoil still afflicting the supermarket retailing sector.

While Tesco appears to be stealing a march on all its rivals and reporting growth across the board, its competitors are having a tough time. Just two days ago Tesco revealed that its recent £2bn annual profit had resulted in £220m worth of windfall bonuses for staff and directors throughout the business.

Elsewhere, Morrisons is still struggling to incorporate the rump of the Safeway chain and its management team are coming under increased pressure from institutional investors to get a grip on the business.

Asda, meanwhile, is looking hard at its offering amid signs that it is still not winning the price war against Tesco. And Sainsbury has had exactly 12 months under chief executive Justin King but has yet to show that it is significantly turning the corner.

Until today, that is. Sainsbury's full-year results reflect the work that has gone into the reorganisation, with a drop in sales, price cuts to realign the product offering with rivals and the cost of sorting out supply-chain problems all evident in the figures.

But leaving aside the headline numbers, it is the detailed cost savings and margin improvements that the City is focused on. And this is where improvement is coming through. Institutional investors, financial analysts and shoppers all acknowledge that King's efforts are having some effect.

Whether they will be enough to close the gap on Tesco, however, is the great unanswered question. The quick answer? It seems unlikely. A £2bn profit makes Tesco look almost unassailable. Much, much more work is needed if Sainsbury is to achieve comparable margins or growth prospects. Analysts have increasingly begun to see the supermarket retailing sector as a one-horse race ? only two if you factor in Asda/WalMart's combined buying power and long-term potential.

Tesco continues to forge ahead on numerous fronts ? financial services, telecoms, clothing, convenience stores. Such is its buying power and marketing muscle that a suggestion earlier this week that Tesco is considering a move into online estate agency surprised no one ? though it may have given estate agents a few sleepless nights.

Analysts pondering the future of the retail sector say that Tesco's future growth is not assured. Staying on top of the consumer's changing tastes takes skill and success cannot be guaranteed. Marks & Spencer thought it had its market tied up, but its subsequent fall from grace has been long and spectacular.

The most interesting observations on the retail sector come from former top Safeway executives. Now all either amusing themselves on golf courses or safe in new jobs elsewhere, most look on with a mix of schadenfreude and horror at what is going on at their former employer. Schadenfreude, a German word that refers to a 'pleasure in the misfortune of others', is a particularly apt description of their mood.

Morrisons has made a pig's ear of Safeway so far, they acknowledge. Far from its northern roots, the company has struggled to get to grips with a much larger, more technically sophisticated business with an altogether different customer base.

Few see an upturn coming any time soon. The complex logistical and accounting systems that underpinned Safeway have been substituted by Morrison's basic systems ? a lot of hi-tech gear was simply made redundant. At the time, analysts hailed Morrison's cloth cap no-nonsense image as a breath of fresh air.

Since then, however, and three profits warnings later, irreparable damage has been done to the Morrison image in the City. Its shares are 25% lower than they were when it took control of Safeway. And about the only thing that is likely to lift the mood in the Square Mile is the prospect of a bid for Morrison. Yet in reality few believe this will happen ? not least thanks to competition authorities that remain opposed to a reduction in competition.

Where does this leave Sainsbury? With a lot of hard work to do. The early signs of recovery are there, but regaining previous heights will take time ? and lots of it. One theory is that the performance of Safeway/Morrisons is flattering Sainsbury's figures. Morrisons is doing so badly, argue some in the City, that Sainsbury doesn't look half as bad by comparison.

That may be so, but it takes a superficial view of Sainsbury's performance. The City was prepared to give Justin King time to sort out the business. Now, 12 months after he arrived, he has to start delivering.

Analysts are not going to be swayed by minor improvements here and there. The evidence so far is positive, but investors or consumers expecting a quick turn-around will be disappointed. This is a long-term game and recovery remains some way off. Fortunately for Sainsbury the City is likely to prove more patient with Justin King than it is with Sir Ken Morrison.