Going to war?
Asda’s trading performance has been a concern for some time. Whilst it is all well and good to ship share to others for a period, it becomes a worry line if that negative momentum persists, like 3Y+, and deepens, not least because stabilisation becomes all the more challenging, potentially costly, and possibly contagious.
Has such a dangerous sector scenario come to pass, with pension age Allan Leighton taking up the reigns at Asda House and putting together a new plan to stabilise and improve? The headlines speak to a price war, which as April commences has not come to pass it should be stated albeit the press just loves to use the term. Indeed, Leighton knows that it is a multi-year programme of self-improvement that is necessary to be implemented at Asda where simply plastering ‘Roll Back’ across its stores will not be the solution.
Whilst Asda has a good store estate and jewels like George in its locker, the firm has been ran into the ground under Moshin Issa’s leadership, a painful thing to write but a development that brought Lord Stuart Rose, prior Chair, to the end of his tether. Asda’s grocery offering is notably, and in places, structurally weak compared to its competitors.
Most critically is the low quality of its private label (PL) assortment backed up by a trading mentality in its commercial corridors that does not serve the firm well in the long run and so a relatively weak supply chain, including IPL in truth. Such deficiencies may never be cancelled or narrowed over consummate private label (PL) players like Aldi & Lidl in the discount space, M&S & Waitrose in the higher category arena, and Sainsbury & Tesco in mass market. Furthermore, the latter two also have structurally superior loyalty mechanics, assortments, and store standards.
Leighton has grabbed the headlines with his profit warning cum investment announcement on Cheltenham Gold Cup Day about the build-up of Roll Back, a 12W promotional cycle, introduced at the end of January along with a cull of 6K SKUs. His approach is sensible albeit he has maybe gone too early, not having his stores in the best shape to attract and keep new or lapsed shoppers whilst giving the heads up to the oppo, which combined if matters really became out of hand, could kill Asda.
And Asda, whilst profitable and rewarding to date to its investors, does not have infinite resources to throw at price & promotion, noting 2.9x non-lease net debt to EBITDA and nearly 5x if leases are included (an IFRS 16 measure) – Sainsbury & Tesco’s balance sheets are structurally stronger, the former with no non-lease debt, the latter with little.
The stock market has taken a dim view of Leighton’s plans, marking down the equities of Marks & Spencer, Sainsbury, and Tesco, which in itself may ease the jeopardy of potentially striking back. Quite how ‘the oppo’ reacts remains to be seen, the Co-op has adopted for an Aldi Price Match, but that is not a seismic matter; it is what Aldi, Lidl, and Tesco do that will.
In a market where costs are notably rising thanks to the naive, ideological, and somewhat stupid Labour regime, we sense there will be a period of watch, wait, and selectively act to Asda’s Roll Back around price and promotion but avoiding irrational and so earnings damaging outcomes, but doing so with clarity and resolution. All of which leads to a central expectation on my behalf that the UK grocery scene is not going to all-out war.
That said, a ‘negative’ cannot be disproved, we just have to wait and see what happens, noting that 8Ws into Roll Back II, food price inflation is accelerating, looking to the BRC-NIQ Shop Price Index for March, prices rising by 2.4% versus 2.1% in February, whilst in that period Kantar actually suggests that Asda’s trading momentum deteriorated to minus 5.6% in the 4W to 22 March. Now, maybe Asda is deflating to so much that volumes are much better, hmmm, that I doubt.
In truth, the sector, Asda’s competitors, suppliers, and shareholders in the industry need the firm to stabilise but to do so in an orderly manner. Market value growth, 2.5-4.5%, gives Asda some leeway and the best outcome for all would be for that minus 5.6% to gradually improve through the year and for favourable comparatives to give it a base to progress in 2026 too. Reaching such an outcome requires investment and better execution by Leighton’s team as well as sensible trading practices and noise.
Let’s see. Asda is a new dynamic for sure in UK grocery, but it is not necessarily a basis for going to war.
Dr Clive Black
Senior Advisor
Coriolis Consulting
April 2025
