Sainsbury's blames profit warning on supply failures

4 November 2004
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04 November 2004 | Liam O'Brien

An overly sophisticated supply chain is driving Sainsbury's to the worst pre-tax result in its 135-year history.

The troubled supermarket chain has issued a profit warning to shareholders admitting that its "sophisticated" supply chain "simply cannot deliver to the required scale". Its new automated depots were failing to perform at the planned levels and leading to poorly stocked shelves.

Supply problems at the UK's third-largest supermarket chain are such that "additional manual support is being introduced where systems are failing". A depot scheduled to close has been reprieved and a closed facility at Buntingford in Hertfordshire is to reopen.

Chief executive Justin King told shareholders that he was writing off £140 million against IT systems and £120 million linked to the retailer's ineffective supply chain equipment. In a move back to basics, King is making 750 head-office staff redundant and employing 3,000 more shopfloor staff.

Analysts believe the failure of Sainsbury's supply chain is the result of introducing sophisticated technology too quickly.

Paul Smiddy at investment bank RW Baird said: "The overall objective was far too ambitious. It was committed to a fully automated distribution system, but instead of approaching it step by step, it went for a sort of big bang in July and found that it did not work. It is now worse off than before the introduction of the new system."

Richard Ratner, analyst at Seymour Pierce, said: "It is a disaster, mostly down to the high-tech supply chain. This is a cautionary tale. You can be sure its rivals will not be going for this approach."

Retail pundits believe Sainsbury's has placed too much emphasis on supply chain savings at the expense of the basics.

Roger Strickland, associate director of Cornwell Management Consultants, said: "Having too complicated a supply chain can screw things up spectacularly. Other retailers, particularly Tesco, whose motto is 'simpler, cheaper, quicker,' have recognised that you can make things too complicated."

Lawrence Christensen, Sainsbury's new supply chain director, formerly at Safeway, was unavailable for comment.

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