pounds 50m bid underlines Sainsbury's US ambitions

J Sainsbury underlined its ambitions in the United States yesterday when it confirmed it is in talks with Dutch retailer Royal Ahold to buy a dozen stores in Connecticut for an estimated pounds 50m.

The deal includes 12 stores and two sites and comes just a week after Sainsbury increased its stake in Giant Foods of Washington to almost 20 per cent. That deal, worth $62m, is seen as the prelude to an eventual takeover of the whole group which would cost Sainsbury around pounds 1.2bn.

"Sainsbury has set its stall out to expand in the US in the same way as Tesco has targeted Europe," one analyst said.

The acquisition of the Connecticut supermarkets was widely expected as part of Royal Ahold's recent purchase of the Stop & Shop chain on America's East Coast. Sainsbury will conduct the deal through its Boston-based Shaw's subsidiary whose stronghold is in Massachusetts though it has also expanded into Rhode Island, New Hampshire and more recently, Vermont. The stores will be changed to the Shaw's name.

Some analysts have questioned Sainsbury's expansion into the US where margins and returns are lower and the supermarket operators, which are regional rather than national, do not have the same bargaining power with food manufacturers.

But others say there is scope for Sainsbury to bring its UK skills to bear on the sector by introducing better systems, cutting costs and improving margins with the introduction of more own-label lines.

Shaw's, which Sainsbury acquired in 1987, has been performing well over the past two years with strong sales and improving margins. Shaw's penetration of own-label lines stands at 40 per cent of total sales, though this is still lower than the 60 per cent penetration in Sainsbury's UK stores.

Sainsbury is expected to buy the remainder of Giant within the next two years. The group's co-founder, Israel Cohen, died last November at the age of 83. The finance director, another octogenarian, recently retired.

However, before Sainsbury makes a large US acquisition it is under pressure to improve its performance in the UK where it has been losing ground to rivals Tesco, Safeway and Asda. The company had cause to cheer yesterday with new figures suggesting that following the launch of its Reward loyalty card in June, Sainsbury is starting to claw back some of the lost sales. According to figures from market research group AGB, Sainsbury's market share rose to 21.1 per cent in July, up from 20.6 per cent in June and 20.1 per cent in May.

Tesco's market share fell to 22 per cent in July down from 22.8 per cent in June.

The Reward card has 5.5 million cardholders and is adding new members at the rate of 100,000 a week.

Sainsbury said: "It's early days yet, but the loyalty card is having the desired affect on our market share.".

However, some City analysts say he sales increases are not enough to cover the costs of administering the card. Sainsbury has already said that increased costs, including the launch of the card, will affect its interim profits due in October.

NatWest Securities' indicative forecast suggests that Sainsbury's half year profits will fall by around 9 per cent to pounds 412-pounds 420m compared with pounds 451m in the same period last year.