Talking shop: Price-driven Asda prospers - for now
Asda has benefited from "relentless focus" on price, says analyst
Asda, the UK's second-largest retailer, has reported "market-leading growth" in early weeks of 2012. Analysts say Asda's focus on price has helped the retailer gain shoppers from the likes of Tesco and Morrisons, although, if and when the economy recovers, it may need to demonstrate it can offer consumers more. Dean Best reports.
With the UK's major food retailers reporting at different times of the year and often providing numbers with slightly different parameters, it can be difficult to come to definitive conclusions when comparing their performance.
Asda, the country's second-largest retailer by market share, yesterday (17 May) posted what CEO and president Andy Clarke called "market-leading" growth when it booked its first-quarter results - and there was some agreement among industry watchers.
Conlumino analyst Matt Piner said Asda was the "outperformer" in the UK food retail sector. Retail analysts at stockbrokers Shore Capital called Asda "the Big Four winner".
Asda reported a 2.2% increase in like-for-like sales, excluding VAT and fuel, for the 12 weeks to the end of March. The result compared to the 1% increase in the final quarter of Asda's last financial year, which comprised the 14 weeks to 7 January.
Recent trading updates from rival retailers indicate Asda is performing strongly.
Earlier this month, Morrisons reported its first drop in like-for-like sales since 2005. Like-for-like sales, excluding fuel, fell 1% in its first quarter, which ran for the 13 weeks to 29 April.
Speaking to just-food, Piner said Asda has gained customers from the "struggling" Tesco and Morrisons. He argued the "majority" of Asda's gains would have come from Tesco, by dint of its position as market leader.
Asda's performance in the first quarter will put more pressure on Tesco, which is spending GBP1bn on reviving its UK sales. Tesco is adding more staff to its stores, initially in its fresh food departments and refreshing or refitting around 25% of its space in the UK.
According to Kantar Worldpanel data for the 12 weeks to 15 April, Tesco accounted for 30.7% of sales, far ahead of Asda at 17.6%. That said, a solid performance from its nearest rival will cause some concern at Tesco, which seen its market share eroded in recent months.
Tesco will also note with interest Asda's claim that its online sales increased by 19% in the quarter, even if the UK's second-largest retailer lags behind its larger rival.
However, Piner said Morrisons' image, after years of growth, may have gone a "bit stale" in the eyes of consumers. Moreover, while he believed Asda and Morrisons are "strong" on price, it has been the former's "relentless focus" on price that has paid off in a UK economy that has again entered recession.
"Although Morrisons is quite strong on price it does have a few different messages. Asda is more about that relentless focus on price and, so far, this year it has played into the nation's mood," he said. "In this kind of environment, Asda always does well."
Asda's owner, Wal-Mart Stores, the world's largest retailer, pointed to the retailer's focus on price as a factor in its performance in the early months of 2012. Doug McMillon, president and CEO of Wal-Mart's international operations, said Asda had "carried the momentum gained over Christmas into the first quarter" as consumers were "trusting every day low prices".
Shore Capital analyst Darren Shirley was positive about Asda's performance, although he did note "comparatives remain reasonably favourable" for the retailer (in the first quarter of Asda's previous financial year, like-for-like sales fell 0.3% and they slid 0.4% in the second quarter).
Shirley also suggested Asda would benefited from "reasonable" weather in March, compared to Morrisons, which suffered from "weak trading and tougher comparatives in through April (last year's April included the Royal Wedding, which boosted sales across the industry).
However, he said Asda had enjoyed "decent trading" in the first quarter of its financial year, was "outperforming its big three superstores" and was "proving to be a thorn in Morrisons' side" and attracting its shoppers. Shirley pointed to the conversion of the former Netto stores to smaller Asda supermarkets and changes to Morrisons' offer.
"Asda's conversion of Netto supermarkets seems to have particularly impacted Morrisons' client base, certainly more discernibly versus than the other players. We believe this is a reflection of the success of those conversions by Asda and the strong geographic overlap across the Trans-Pennine region but also what we see as a lack of punch in Morrisons' offer for elements of the market at present," Shirley said.
"Admittedly more subjectively, we wonder if the evolution of Morrisons' offer, in particular its upmarket, aspirational and experiential drive through Fresh Formats and M-Kitchen is moving the offer too far away from its core value-based customers. Customers who may well have tried Asda and liked what they have seen, whilst Morrisons has yet to attract higher-category shoppers away from Marks and Spencer, Sainsbury's and Waitrose, not least because Morrisons' product still does not meet their expectations across the store."
One could argue that Morrisons' initiatives are attempts to position itself as a retailer that offers consumers more than just keen prices and, if and when the economy improves, Asda will need to demonstrate that its strategy involves more than just EDLP. For all the retailer's recent success, it suffered in late 2009 and 2010. In April 2010, Kantar spoke of a "sustained return to premium" that was hitting Asda's market share.
"Longer term, Asda's relentless focus on price might not prove so advantageous," Piner said. "It's somewhat one dimensional approach has caused it problems in the past, and as the economy recovers it might well find itself losing shoppers that feel they can get better quality elsewhere. However, this is very much a concern for the future and over the rest of the year the retailer is likely to continue gaining share at the expense of its competitors."
Nevertheless, Asda will be hoping it can manage any upturn in consumer confidence better than it did two years ago.
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