J Sainsbury plc Can’t Afford A Price War With Tesco PLC

sainsbury'sThere’s a right time to leave but not many people manage it. When Justin King arrived at Sainsbury’s (LSE: SBRY) (NASDAQOTH: JSAIY.US) the supermarket barely had any shelves full and millions had been wasted on a faulty IT system. King fixed both and, as Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) shifted focus abroad, he pulled the plug on Sainsbury’s US expansion.

His mentality was about making the basics work. He looked inwards and focused on own-brand food. He slashed profits dramatically but made the business more competitive — by lowering prices and investing more in staff and stores. He leaves having almost trebled profits.

What kind of job does that leave the new chief executive Mike Coupe?

Sainsbury’s has peaked

Tesco’s former boss Sir Terry Leahey left to a chorus of writedowns, profit warnings and a disastrous £2 billion failed US expansion. This Christmas Sainsbury’s was the big winner among the grocers as it increased its market share — which currently stands at 17.7% — but there’s a danger that things have peaked.

Being the strongest performer now doesn’t mean that that position won’t change. The rate of growth is slowing, and last month Sainsbury’s scaled back its sales expectations, with a warning that shoppers are buying less food.

The problems facing the big supermarkets are numerous. Shoppers are buying more online, which is a crowded, competitive marketplace. Squeezed incomes are seeing customers flee to discount stores such as Aldi and Lidl.

Sainsbury’s posted a 0.2% increase in like-for-like sales, which is respectable if not remarkable, but indicative of a slowdown for the retailer. There are concerns that profitability will come under mounting pressure in 2014, where a rejuvenated Tesco will be a factor, meaning new chief executive Mike Coupe should have his hands full. Going forward generating shareholder value is going to be extremely tough.

An insurmountable task

Those that know Mr Coupe — a retail veteran having worked at Tesco, Asda and Iceland — say that he’s exceptionally bright and good with strategy. As a bigger ecommerce evangelist than his predecessor, we should see Sainsbury’s ramp up its online offering, as well as new technology added to stores. Credited with inventing Sainsbury’s Brand Match promotion, he’s also likely to have new marketing ideas.

Key to remember is that Sainsbury’s is still only half the size of Tesco and, if you’re a shareholder waiting for some good news in terms of profitability, then you’ll be disappointed. Profit growth was always something that eluded Justin King, and with Sainsbury’s having the lowest margins in the sector, cutting prices further to drive sales isn’t an option. It is an option for Tesco, however, who can afford to cut prices by half.

In the event of a price war, Sainsbury’s only option may be to batten down the hatches.

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> Mark does not own shares in any company mentioned. The Motley Fool owns shares in Tesco.