Lagging margins force J Sainsbury to relaunch Savacentre as budget stores

J Sainsbury yesterday backed down from its pledge to achieve industry leading margins by 2004 and said it was reining back on new store refurbishments in order to open new versions of its Savacentre format instead.

Britain's second-largest supermarket group wants to relaunch its Savacentre concept as a budget format that will enable it to drive sales in areas outside its South-east heartland. It will provide a direct challenge to rivals such as Tesco and Asda in the Midlands and the North.

Sir Peter Davis, the chief executive, said six new Savacentres will open in the next 12 months on top of the existing 12. However, the new stores will be about 40,000 square feet rather than the huge hypermarket scale of the existing Savacentres.

The stores will not sell the more "luxurious" Sainsbury's foods but offer more economy lines and big-value packs instead. It will also offer a wider range of non-food goods, including Early Learning Centre toys and Adams childrenswear. Sir Peter said: "We have always done well in areas of average affluence and above-average affluence. Now we are aiming at young families with children, on a budget."

The move will mean Sainsbury's will not refurbish all its store portfolio by March 2004, as previously promised, because it said the investment in lower income areas may not yield a return. Most analysts welcomed the move. One said: "If all Sainsbury's did was peddle posh food to posh people, they'd be in trouble."

The company admitted it will not achieve industry leading margins by summer 2004. The news came as Sainsbury's said margins rose just 0.1 per cent to 3.8 per cent, way behind Tesco's 6 per cent. Instead the company has pledged to deliver double-digit underlying profit growth during each year of its three-year recovery programme. It has also pledged to deliver £100m additional cost savings by 2004, taking the total to £700m.

The changes angered some analysts and Sir Peter admitted it had been a mistake to give such specific targets.

The comments came as J Sainsbury reported a 14 per cent rise in underlying profit to £627m for the year to 30 March. Like-for-like sales were up by 6.3 per cent on the previous year, though this has slowed in current trading.

Sir Peter, who claimed at Christmas to have won customers from Sainsbury's arch-rival Tesco, said this had not been the case in April.

Sainsbury's Bank increased profits to £22m, but the Sainsbury's to You online grocery service recorded loses of £50m. the company said it expected the service to be profitable by 2004.

ABN Amro increased its full-year profit forecast to £720m. The shares rose 70p to 370p.