J Sainsbury prepares for price war

J Sainsbury is arming itself for a price war as the supermarkets battle it out for the custom of cash-strapped consumers.

Britain s third-largest supermarket reported its lowest sales growth in five years and warned that lower food inflation would drain the wider industry of growth just as rising fuel prices and taxes put pressure on household budgets.

Sainsbury s, the first of the big supermarkets to issue a trading update for the early part of this year, predicted that the pattern of meagre overall growth and frail consumer confidence would be repeated by rivals.

Justin King, the chief executive, said: We believe we have the competitive deals and fire power to stand toe to toe and still win, as indeed we have in the quarter.

Like-for-like sales growth, which excludes takings from new stores, slumped to 1.7 per cent, compared with 6.2 per cent this time last year.

Mr King said: The last two or three years have been unusual, for 25 years we had low or no inflation. The growth that the majority of supermarkets have enjoyed has been hard-won, either from each other by growing their share of total food or other areas like non-food.

Mr King, who earned a total of 5 million in 2008 after hitting turnaround targets, said that Sainsbury s would increase its coupon at till offers, which use loyalty card data to tailor deals for particular customers, rather than respond through ramping-up conventional promotions.

Industry figures suggest that the big four supermarkets Tesco, Asda, Sainsbury s and Wm Morrison have all suffered a decline in sales growth, because food prices are rising less sharply.

But analysts, citing industry figures for the past month, have suggested that Sainsbury s has been hit hardest and faces a squeeze from Tesco, which has caught up with its rivals sales growth in recent months, and a resurgent Asda, which has responded to a dismal Christmas performance with aggressive offers.

Greg Lawless, a retail analyst at Collins Stewart, said: The most recent [industry figures] highlighted that Sainsbury s had slipped below the market for the first time in 18 months. We have been suggesting for some time that Sainsbury could become the laggard with a resurgent Tesco, and Asda acting somewhat irrationally. The simple maths is that if Tesco is amongst the top two fastest-growing, in a low-inflation environment, then one of the big four loses.

Food inflation fell last month to a three-year low, according to the British Retail Consortium. The closer inflation gets to zero, the more retailers must steal share from each other to increase sales.

After a poor Christmas trading performance, Asda hit back with 5 and 10 money-off vouchers in newspapers. Sainsbury s yesterday emphasised store openings and an extension of its non-food offers as sources for growth. Last year it raised 432 million to accelerate its store openings.

The company said that sales of non-food, where it has lagged behind Tesco historically, were growing at three times the rate of food sales.

However, analysts said that this was below the rate observed in previous quarters, when non-food sales grew at four times the rate of food sales.