By James Davey and Kate Holton
LONDON (Reuters) - Sainsbury's threw down the gauntlet to larger rival Tesco on Wednesday, taking a hit on profits and the dividend to fund lower prices for customers in the latest escalation of the British supermarket battle.
Sainsbury's, which had outperformed the sector for years until a recent slowdown, plans to cut spending hard, rein in its property expansion and find more efficiencies in the business to pay for lower prices.
The strategy was the first big announcement from new boss Mike Coupe who took over in July. He had been under pressure to show he could respond to the toughest market conditions for decades and avoid the deeper problems faced by market leader Tesco and smaller rival Morrisons.
"We are facing a once-in-a-generation combination of cyclical and structural change in the industry," he said. "I firmly believe that this strategy ... will focus and energise our business to the benefit of customers, colleagues and shareholders alike."
Shares in the group were little changed at 0835 GMT, failing to sustain an initial four percent rise.
The need for change indicates that the vicious price war has caught up with the 145-year-old firm, which had posted nine unbroken years of sales growth under previous boss Justin King, before it started to slide at the end of its 2013-14 year.
GERMAN THREAT
Strengthening its balance sheet will give Sainsbury's more firepower to try to counter the growing threat of German discounters Aldi [ALDIEI.UL] and Lidl [LIDUK.UL], which have taken market share from all of Britain's so called "big four" grocers.
"Mike Coupe is certainly honest about the unique challenges the supermarkets are facing at present," said John Ibbotson, director of the retail consultancy Retail Vision. "The upheaval will go on for years, and the low cost discounters look set to be the main winners."
Sainsbury's said it would invest an additional 150 million pounds in lower prices over the next 12 months, which means its profitability will be lower in the second half than the first half.
As a result, it expects its full-year dividend to fall although it held its interim payout at 5.0 pence.
The firm said it would open 500,000 square feet of space in each of the next two years, followed by 350,000 square feet in 2017-18 - down from the 750,000 square feet for 2014-15.
The group also plans to increase its non-food range, offering more clothing, homewares and seasonal products, to diversify its appeal and to fill excess store space that has developed as customers shop in smaller, local stores.
"Eyebrows will be raised at the news that Sainsbury think that 25 percent of their stores are over-spaced, where does that leave Tesco?," said independent analyst Nick Bubb.
Sainsbury's will slash capital expenditure to between 500 million pounds and 550 million pound per year over the next three years, and deliver cost savings of 500 million pounds over the three-year period, to help it fund the lower prices.
It posted a profit before tax and one off items of 375 million pounds ($597 million) for the six months to Sept. 27 -- ahead of analysts' expectations of about 350 million pounds but down from 400 million pounds in the same period last year.
It posted a statutory pretax loss of 290 million pounds, reflecting exceptional charges, including an impairment and onerous contract charge of 628 million pounds.
(Reporting by James Davey; editing by Kate Holton/Keith Weir)