Asda profits crash as discount chains bite

ASDA has admitted that its performance last year was “behind our expectations” after its profits crashed by almost a fifth and sales languished below its rivals.

Pre-tax profits tumbled by 19.9pc to £657.2m compared to £820.1m the year before, while group sales fell by 3.2pc to £21.7bn. On a like-for-like basis, which measures shops open for more than a year, sales dropped by 5.7pc.

On an underlying basis, which strips out costs involved in a restructuring Asda’s holding companies, operating profits fell by 11.5pc to £1.01bn. Despite this performance, Asda still paid its US parent Walmart a £450m dividend.

Asda has been battered by the rise of the discount retailers Lidl and Aldi, which has prompted other major supermarkets to slash their prices. However, Asda’s former management team sought to protect profit margins, rather than take part in what it viewed as the “gimmicks” of a price war.

The supermarket has now suffered 11 consecutive quarters of falling sales while former boss Andy Clarke was ousted from the business last year.

Asda said: “Our sales performance, relative to the market, was behind our expectations.” New boss Sean Clarke has been driving a turnaround focusing on retail basics and reducing prices on selected food items.

DISCOUNT retailer B&M Bargains is the latest company to take part in the frenzied consolidation of the convenience food market in a £152m swoop on Northern grocer Heron Food Group.

Simon Arora, boss of B&M, said that the acquisition of 251 shops was a “nobrainer” of a deal and would mean that B&M could offer discount groceries from convenience shops and undercut the higher prices that supermarkets offered at its smaller stores. “The price war from the ‘big four’ has been focusing on the big family shop…we won’t be getting involved in the weekly shop battle,” said the B&M boss.

Mr Arora said that he saw the growth opportunity for low-cost convenience retailing, as the bitter price war between the major supermarkets had focused on their larger stores, whereas items in Sainsbury’s Local and Tesco Express were often more expensive.

“The convenience sector has been growing very well and they are now the source of supermarkets’ growth while their mother-ship supermarkets have been struggling. But as a sector, the convenience market has not been well served on price,” Mr Arora said.

The move is still a significant departure for B&M, which has primarily focused on selling low-cost general merchandise items such as paddling pools, bedroom furniture, lawnmowers, toiletries and cleaning products. Food and alcohol currently makes up only a small part of its sales.

In addition, Heron Foods’ high street shops, which have evolved from the freezer centres that were popular two decades ago, are around eight times smaller than B&M’S shops, which tend to be vast warehouses on retail parks.

Jonathan Pritchard, analyst at Peel Hunt, said that some watchers “were expecting a European deal and may thus be disappointed that £150m has been routed to the UK”.

However, Mr Pritchard said that he thought the deal would “address a gap in the core grocery range”, and he believed the deal for Heron Foods did not “preclude a European deal at all”. The move will be a significant shakeup for the convenience food market, which has already seen Tesco launch a £3.7bn takeover of Budgens and Londis owner Booker and Sainsbury’s make a £130m play for Nisa while Morrisons struck a supply deal with the convenience chain Mccolls.

B&M, which has recently been subject to speculation about a £4.4bn takeover by Asda, has made it clear that it is focused on its own acquisitions. Asda sources have downplayed its interest in B&M and said the supermarket’s analysis of the retailer had been as an emerging competitor, rather than a target.

B&M, whose chairman is the former Tesco boss Sir Terry Leahy, has grown rapidly as it has targeted cost-conscious shoppers. The company plans to expand from 543 shops to 950 across the UK and from 79 shops in Germany.

B&M said it was paying £112.1m upfront for Heron, though the deal’s value is as high as £152m once Heron’s debt is included, and a further £12.8m dependent on its earnings in 2019. It shares rose 3.5pc to 372.3p.