Sir Peter's successor will have to improve sales

They were angry that Sir Peter had been awarded a £2.4m bonus at a time when profits and market share were falling.

Sainsbury's also warned that its profits for this year would be "significantly below" expectations, causing its shares to drop sharply.

Former Lloyds TSB and BT finance director Philip Hampton has been named as Sainsbury's new chairman.

Sainsbury's has lost ground to both Tesco and Asda and in May it reported a 2.9% fall in annual profits.

Falling sales

Sir Peter's resignation is believed to have followed an emergency board meeting on Wednesday evening, following shareholder anger that he had been awarded the £2.4m bonus.

1. Joins as chief executive 2. Becomes chairman 3. Stands down Current Sainsbury's share price

He became Sainsbury's chairman only three months ago, having been chief executive for four years.

Prior to that the 62-year-old was group chief executive of Prudential from 1995.

He previously worked for Sainsbury's for 10 years from 1976 as assistant managing director responsible for buying and marketing operations.

Sainsbury's thanked Sir Peter for "all his hard work on behalf of the company".

But it said it had not been possible to reach agreement in talks with Sir Peter over changes to his bonus package.

"It was mutually decided that this matter would be referred to legal representatives of both parties as part of his termination arrangements," the company said.

Losing ground

Sainsbury's said the financial skills of Mr Hampton and the proven retailing talent of chief executive Justin King, who started in March, were a powerful combination that could take the group forward.

"I'm very confident there is a place for Sainsbury's in the supermarket sector Sainsbury's chief exec Justin King Q&A Sir Peter and Sainsbury's

Mr Hampton, who is a non-executive director of Belgian telecoms group Belgacom and of cement maker RMC, will get a salary of £395,000 a year.

Before appointing Mr Hampton as the new chairman Sainsbury's took the precaution of first sounding out the opinion of investors.

It failed to do this back in February when it announced that former Bass boss Sir Ian Prosser would take over as chairman from July 2005.

This provoked such shareholder anger that Sainsbury's was forced into a quick U-turn and abandoned Sir Ian's appointment.

Continuing efforts

Over the past few years Sainsbury's has lost ground to its main supermarket rivals.

Previously the number two supermarket in terms of market share behind Tesco, it has since been pushed into third place by Asda. And Morrisons, which recently bought Safeway, is now threatening to overtake Sainsbury's.

The last thing troubled Sainsbury needed was a chairman who had gone beyond his sell-by date Jeff Randall, BBC business editor Why Sainsbury's boss had to go

And while Tesco, Asda and Morrisons have reported rising sales and profits, Sainsbury's has struggled to keep up.

For the first quarter of this year Sainsbury's said total sales were up 1.9%, thanks to strong petrol sales.

It added that customers were already seeing the benefits of moves to lower prices and improve product availability, but admitted that a rise in profits was still some time away.

"Underlying profit before tax for 2004/05 will be significantly below consensus market forecasts with the majority of the impact expected in the first half," it said.

Time and money

Mr King said he can turn the tide at Sainsbury's, but would not be drawn on how he will kick-start growth until his ongoing review is completed.

"I'm very confident there is a place for Sainsbury in this market," Mr King said.

New chairman Philip Hampton has a challenge ahead of him

Analysts broadly welcomed Mr Hampton's appointment, but wondered how long he will be given to turn things around.

"Hampton has a reputation for establishing shareholder value," said Tim Rees, fund manager at Insight Investments. "We have to afford him the time to consider what to do next at Sainsbury."

Paul Smiddy, retail analyst at investment manager Baird said what concerned him most was that the latest profit warning came so soon after the publication of Sainsbury's annual results in May.

However, he added that "the departure of Davis clears the air and allows the group to move forward".

Contrasting bonuses

The Transport & General Workers Union, which represents more than 12,000 Sainsbury's staff, said it was happy about Sir Peter's departure, but attacked his £2.4m bonus.

It contrasted the payment with the supermarket's recent decision to scrap a 25-year-old £100 Christmas bonus.

"This is a £2 million-plus award which will do Sir Peter very nicely while 15% of Sainsbury's staff missed out on a pay rise and the Christmas bonus scheme is being cut," the TGWU said.