Five years after joining the Wal-Mart family, Asda is fast becoming the jewel in the US giant's crown. David Robertson finds out why, and investigates how Asda will build on its current success.

Christmas is a boom time for retailers of all sizes in Europe and North America so it is no surprise that Wal-Mart, the world's largest company and retailer, should see sales surge during this period.

However, what does raise an eye is that 18 of Wal-Mart's top 20 performing stores were not in the company's heartland of Middle America, but in the UK.

Asda, the supermarket chain bought by Wal-Mart for £10.8bn (US$20.36bn) in 1999, has become a vital important part of the Arkansas-based behemoth. Asda's influence within Wal-Mart appears to be considerably greater than its size would suggest; after all, Asda has just 280 stores while Wal-Mart has more than 4,800 worldwide.

This ability to punch above its weight has been built on Asda's strong food offering, which has continued to increase sales despite tough competition, and also the George range of clothing, which has become the biggest clothing brand in the UK and could be about to extend that domination globally.

Asda is unusually coy about its strong performance within the Wal-Mart group. A company spokeswoman told just-food.com: "This was largely because our stores are primarily food stores where people come to stock up on all the food and drink they need over the festive season while Wal-Mart stores are largely non-food. Our extensive seasonal and non-food ranges undoubtedly increase our sales at this busy time of year, but it's still turkey and sprouts for Christmas dinner that brings customers into our stores."

US-owned, but Asda isn't forgetting its Yorkshire roots

Asda may now be owned by an American company but its refusal to blow its own trumpet harks back to its Yorkshire roots. But how has Asda positioned itself so strongly within Wal-Mart?

Food is still the core business for Asda, despite its push over the last decade into non-food items. Wal-Mart does not release separate trading information for Asda but market research firm TNS estimates that total sales were up 5.7% during the Christmas period.

This does not quite match Tesco, the dominant power in UK supermarkets, which increased sales by 7.6% in the seven weeks to 8 January but Asda was well ahead of rivals J. Sainsbury and William Morrison. Sainsbury's sales fell 1.2% in the 12 weeks to 1 January and Morrisons increased sales by just 0.1% in the six weeks to 1 January (Morrison's recent acquisition, Safeway, saw sales fall 8.4%).

Aggressive price cuts

Asda's sales pitch has always been "low cost" and it cut prices by more than £175m during 2004. All the other supermarkets have followed Asda's lead, but only Tesco has attempted to keep up with the level of Asda's price cutting.

Non-food offerings have also been important for Asda, with Tesco heading in this direction too. Together they have put enormous pressure on traditional high street retailers like Boots and Woolworths and many experts predict that these companies will have to find a way to fight back or risk losing millions of customers to the supermarkets.

Asda's George brand has been a stunning success in the UK, where it has overtaken Marks & Spencer as the most popular clothing brand. Wal-Mart has identified George's potential (the brand is not only very cheap but is also considered fashionable) and is pushing it into Wal-Mart stores all over the world. Some analysts predict that George could become Wal-Mart's most important apparel brand, which would almost certainly make it the biggest clothing brand in the world.

Leigh Sparks, professor of retail studies at the University of Stirling, told just-food.com: "Asda's non-food offering is interesting. George is clearly a major brand and Wal-Mart's non-food power is being brought to bear in the UK. Tesco is trying to catch up and its web presence is powerful. This will only continue so the major high street non-food retailers are going to have to enhance their offer."

But what will Asda's plan be for 2005?

Asda's core price-cutting strategy is likely to remain exactly the same. The company has already announced £17m in price reductions for the Good For You range. Health foods are expected to be a big battle ground this year as the UK government puts pressure on the food industry (suppliers and retailers) to cut obesity. Asda will be promoting its healthy credentials with a £7m advertising campaign fronted by Sharon Osbourne.

However, both Asda and Tesco have cut prices so far that further reductions may be difficult without alienating suppliers completely. Perhaps an indication that Asda is looking to develop other sales strategies was the announcement that stores in the north-east of England would source more products locally - and they would be branded as such in the store.

Asda has also been desperately trying to increase the number of its stores, which is notoriously difficult in the UK. Planning permission for a new store can take up to ten years, which explains why both it and Tesco went to such lengths to secure the handful of Big W stores being sold by Woolworths. Asda is rumoured to have paid £50m for a single store.

Unlikely to go the mini-mart route

Given the difficulties of building more retail space in out-of-town areas, Asda has said that it will open more high-street stores, where planning permission is easier. It may also buy a presence on the high street and the company has been linked with the Littlewoods stores owned by the Barclay Brothers.

However, this strategy is likely to be limited to non-food products (George and Asda Living, which sells items for the home). Asda is unlikely to jump on the bandwagon of supermarkets opening urban mini-marts.

An Asda spokeswoman explained: "Our competitors can only operate convenience stores on the high street because they're prepared to charge a premium for products that are sold more cheaply in their larger stores. We're not prepared to do this, and give our customers one price that's available at all our stores from Elgin to Falmouth."

Given the difficulty many companies have had making urban mini-marts profitable, this appears to be a very sensible strategy. However, Asda might need to expend more effort on its internet offering if it is not to abandon the inner city-based consumer completely.

Overseas expansion?

Another possibility for organic growth is international expansion, particularly in the Republic of Ireland where the government has just loosened restrictions on new supermarkets. Wal-Mart is understood to want to enter the Republic and Asda seems a very likely candidate to initiate this move. There are three reasons for thinking so: the first is potential supply synergies given the proximity of the UK and Irish markets; the second is that debt incurred building the Irish operation can be offset against Asda profits under UK tax rules; and finally, the Asda brand does not come with anti-American and anti-Bush baggage - an increasingly important consideration in Europe.

Asda is unlikely to bridge the gap between itself and Tesco anytime soon but its non-food offerings are more advanced and if the market continues its trend in that direction, Asda is well placed to continue delivering the sort of performance that has made it such an important part of the Wal-Mart empire. This will be particularly important if Asda starts to run out of price cutting options.