Asda prof­its crash as dis­count chains bite

The Daily Telegraph - - Business - By Ash­ley Arm­strong

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.

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