Supermarkets in battle for survival

Sainsbury’s and Safeway are high on the hitlist of UK takeover targets, and City analysts are predicting that one or the other could be bought within the next couple of years.

Both have seen their market shares eroded over the years, as they suffer tough competition from price-cutting rivals Tesco and Asda/WalMart. The two weakest of the UK’s big four are struggling to recover their positions.

Both supermarkets have switched marketing strategies under new chief executives, and half-yearly results published last week give early evidence of how these strategies are working. While Sainsbury’s re-instated its celebrity-backed brand building strategy with a &£25m television campaign featuring the Naked Chef Jamie Oliver, Safeway has scrapped national advertising altogether and funnelled the cash into weekly discounts on top-selling lines, backed by a direct mail campaign.

It is a move that has paid dividends for Safeway, which announced half-year profits up ten per cent to &£166m on sales up eight per cent to &£4.74bn. Like-for-like sales have risen five per cent, and market share has grown slightly by 0.2 per cent to 9.7 per cent.

Some analysts believe this is a short-term turnaround which has simply “dressed” the retailer for sale. Others say this view is cynical, and believe the company has taken enormous steps to turn itself around.

In May this year Safeway chief executive Carlos Criado-Perez ruled out the company returning to national advertising. He reconfirmed this in last week’s announcement.

“We are delivering flyers to one in every three households in Britain every week. The effectiveness of our high/low strategy gives us a competitive advantage,” he says. This is evident, he claims, in the fact none of the competitors have yet been able to find an effective way to copy or react to it.

Criado-Perez says the flyers have raised the number of transactions in stores by ten per cent, though they have increased footfall rather than the amount of shopping people are buying. The flyers, he claims, have been the fastest and most effective short-term way to create growth.

It is no guarantee that shoppers will do anything other than go bargain-hunting, which carries the danger that they will reject the more expensive, and profitable, Safeway products.

In fact, some analysts see a return to national brand advertising as a must. The Safeway brand doesn’t stand for anything now, they say.

Retail Intelligence analyst Richard Perks says that although the flyers have worked in getting customers into the store, Safeway has always been considered more expensive than Sainsbury’s.

Verdict Research director Mike Godliman agrees that Safeway has never had a strong brand in the UK, but says the DM campaign has done what it was designed to do – bring customers back through the door, though this will not work on a long-term basis.

Sainsbury’s, on the other hand, has renewed its emphasis on quality with its major television campaign featuring Jamie Oliver. Sainsbury’s finally settled on this campaign after re-appointing Abbott Mead Vickers.BBDO last July under new chief executive Peter Davis. The campaign followed the “Making Life Taste Better” campaign by M&C Saatchi and the disastrous John Cleese ads in 1998.

But it is in the nature of branding campaigns that they do not usually offer immediate results. Sainsbury’s departmental director of brand development Andrew Ground says the company’s marketing strategy is based on quality which runs not only through the ad campaign but the whole look of the stores. The supermarket has focused on testing new store formats and how to make the food better.

Ground questions how Safeway can continue with the flyer campaign, having achieved short-term success. “How can it keep the campaign going? It needs a proper strategy. We have done that with our recovery strategy,” he says.

He believes that, pound for pound, Safeway’s direct mail campaign and Sainsbury’s brand-led national campaign are equal. He stresses that Sainsbury’s will always focus on quality, rather taking on its rivals on price.

But analysts say Sainsbury’s has major infrastructure problems because of under-investment in the past. The chain focused on expansion and refurbishment of its existing stores during the first half of this year and aims to improve another 100 to 150 stores over the next six months.

Sainsbury’s recorded a profit fall from &£361m to &£300m with like-for-like sales rising by only 2.4 per cent. Supermarket sales are up five per cent to &£7.3bn in the six months to October 14.

Perks says the figures, looked at superficially, show Safeway doing well and Sainsbury’s badly. But Sainsbury’s has invested a lot of money in the business which had not been done over the years. And he believes the Sainsbury’s figures are encouraging with sales moving in the right direction.

Analysts will still not say which they think will survive the battle. As Tesco and Asda’s market shares have increased over the past ten years while Safeway and Sainsbury’s have remained flat, they conclude something will have to give, and one of the players will be taken over.

Safeway is too big to be bought outright by any of the major UK players without it being vetted by the Competition Commission. Perks says Sainsbury’s would be interested in buying parts of Safeway, and believes an Asda buyout would be a disaster because Safeway and Asda stores are at different poles of the supermarket sector.

Sainsbury’s is not weak enough in his eyes to be at risk of being sold off and has the added safety of being family-owned.

It will be a couple of years before the results of the two contrary marketing campaigns can be clearly examined. Sainsbury’s long-term focus on quality communicated through branding campaigns and up-market store designs is a slow-burn approach. Its success will be judged over years rather than months.

On the other hand Safeway’s price-led direct marketing strategy, however much it brings short-term gains, could soon run out of steam by failing to give it a clear positioning in shoppers’ eyes.