Stuart Rose is not a happy man. There is little in retailing that he has not seen during his long career, but the challenge of stopping the rot at Asda, where he is chairman, ranks among the most intractable of them. Market share is the key indicator here, and Asda is losing.
Contrary to general belief, food retailing is highly competitive, with fractions of one per cent fought over, so Asda’s fall from 13.7 per cent to 12.6 per cent in the 12 weeks to August 4 is little short of disastrous. That most of the market share gain went to Tesco, rather than the usual upstarts Aldi and Lidl, makes the loss more painful.
This decline has been coming for quite a while. Wal-Mart had bought Asda for £6.8bn in 1999. It found that transplanting retailing eastwards across the Atlantic was just as difficult as most UK companies find it going west, and 22 years later Wal-Mart sold the business for almost the same price it had paid. The buyers were a pair of service station entrepreneurs, Mohsin and Zuber Issa, borrowing a heroic amount when money was almost free in 2021. Of the £6.8bn, just £200m came from the brothers’ own funds. It was one of the most dramatically levered deals in the heyday years of private equity.
Asda had traditionally been the price leader for petrol, but margins had to be improved to help service all that debt. All supermarkets were under the cosh as inflation took off, and nobody rushed to undercut the suddenly less competitive Asda. The result was a short-term gain as company profits jumped, but the Competition and Markets Authority has stepped in. It found that supermarkets’ margins had almost doubled since 2017, to 7.8 per cent, meaning that motorists had paid an estimated £1.6bn more as a result.
Fortunately for the new government, we have hardly noticed because the oil price is volatile and in recent months has been falling. It’s surely a racing certainty that the new Chancellor will grab the chance to add a penny or three onto fuel duty in her first Budget, probably wrapping it up as “encouragement” to push us further towards electric cars.
The CMA is now demanding better publicity for prices to foster competition, a move that will not make Stuart Rose’s task any easier. The Issas have restructured the shareholdings, with Zuber selling his stake to TDR Capital, their partner in the acquisition, and rising interest rates have made life much harder for this type of leveraged business. Stretched finances are not a helpful backdrop to attempts to regain market share by price cuts. Turbulence among the shareholders, and suggestions that the Issas are better at doing deals than running supermarkets point to more management changes. It doesn’t look like a return to stability any time soon.
Write to us with your comments to be considered for publication at letters@reaction.life
