The Risks Of Investing In J Sainsbury Plc

Today I am highlighting what you need to know before investing in J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US).

A step into the unknown

The big news dominating Sainsbury’s in recent days is the exit of chief executive Justin King, whose decade-long tenure at the retail giant came to an end at the group’s AGM this week. Under his leadership he transformed the chain’s tired image, led the firm into the bountiful online and convenience sub-sectors, and oversaw a glorious period of profits growth — indeed, Sainsbury’s saw pre-tax profit leap 16.3% to £898 million in 2013 alone.

King will undoubtedly be a hard act to follow, and although he has built a strong management team around him, questions will be raised as to how his successor will lead the chain in an environment of increased competition.

Bargain chains focus on quality

Speaking of which, Sainsbury’s will have its work cut out to keep at bay the relentless march of the budget chains. While the retailer has beenSainsbury's more successful than its mid-tier rivals such as Morrisons and Tesco in keeping the till rolls ticking over, the discounters’ latest push to boost their range of premium products is a direct shot across the bow of Sainsbury’s.

The London-based firm fired back last month when it announced plans to reintegrate Danish low-cost chain Netto back into the UK after it disappeared under the Asda logo back in 2010. But with the competition taking no quarter in the ongoing retail wars — indeed, Lidl plans to open a further 20 stores by the end of 2014, taking the total to 620 as part of a broader £220m investment plan — Sainsbury’s entry is guaranteed to be no cakewalk.

Online competition upping the ante

As well, Sainsbury’s should also be cautious over the recent entry of Morrisons in the online retail space. Operating alongside Asda, Tesco, Waitrose and Ocado — and Amazon also increasing their own grocery delivery businesses in the UK — the space is more congested than ever, and Sainsbury’s may be forced into heavy discounting and a steady stream of online initiatives to keep sales ticking higher.

Sainsbury’s has proved that it has what it takes to keep the checkouts ringing out both online and in-store, achieved through a delicate balance between product quality and cost, clever brand development and significant investment in hot growth areas. But whether the business can maintain this momentum in an increasingly-competitive marketplace remains to be seen.

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> Royston does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares in Tesco.