Will the barbarians sack Sainsbury’s?

Tesco reports that people are already shunning poultry products like the plague; plumping, ironically, for beef instead.

Never mind that the chances of dying from the present strain of avian flu are even longer than those of winning the National Lottery jackpot. The same could have been said of contracting variant Creutzfeldt Jakob disease, and look how long the BSE crisis took to subside.

If there’s a crumb of comfort, it’s that Tesco can congratulate itself on hedging against precisely this sort of crisis by diversifying out of groceries. Less so the other supermarket chains – especially Sainsbury’s, which now finds itself combating a viral contagion of a different sort: the private equity bug.

Sainsbury’s justly prides itself on being a great brand. Whatever else it may have got wrong in recent years, its marketing has been consistently excellent. So its marketing department, and allied marketing services agencies, could hardly be blamed for coming out in a rash at the thought of a takeover by KKR, Blackstone and CVC – and if not them, some rival private equity consortium.

After all, private equity specialists are the ‘asset strippers’ of our day, are they not? Once they move in, cash is the only criterion, and – given the objective is usually a medium-term return to the stock market – luxuries, such as a generous marketing budget built around long-term brand objectives, are ruthlessly stripped out. Marketers, check your contracts and prepare for your P45s.

Well, not necessarily. At the gate they may be, but these barbarians have good reason to avoid indiscriminate sacking. While operational improvements certainly could be made at Sainsbury’s, these are not the focus of a prospective takeover. If they were, a better time to launch the bid would have been 18 months ago, before Justin King and his team initiated a turnaround. The current bid (when it materialises) is all about opportunism: the fortuitous selling down of the Sainsbury family stake gives any predator a crack at the real prize: spinning off the multiple’s £7.5bn property portfolio.

Admittedly, this may have some consequences for the operating business. For example, leasing back property rather than owning it could be negative for margins, causing the new owners to seek economies elsewhere. In this case, though, they would be foolish to look for them in the marketing department. In fact, the record of private equity owners on marketing spend is better than it might seem. Hicks Muse, for example, which remains a stakeholder in Premier Foods, has very much been a buy-and-build operator which supports marketing spend. Elsewhere, Martin Glenn, chief executive of the now-private Birds Eye, testifies that marketing spend has increased to help sustain top-line growth.

In one way at least, private equity ownership of Sainsbury may even be highly beneficial to the brand. Away from the daily distractions of City investor relations, the new team will be able to take a more strategic view on shifting the balance of product towards higher margin non-food items. And that should be a good thing, next time there’s a livestock scare.


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