Asda takeover threatens price war

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AMERICA'S RETAILING giant, Wal-Mart Stores, sent shockwaves through the British high street yesterday when it announced a surprise pounds 6.7bn takeover of Asda, Britain's third largest supermarket group.

The deal is expected to lead to a new era in price competition and a possible all-out price war as UK companies battle to match the prices offered by the new player in the market.

Wal-Mart, the world's largest retailer, has built a fearsome reputation for rock-bottom prices. Its huge, warehouse-style stores sell everything from food, to deckchairs to computers . The broad range and low prices have often proved too savage for the local competition in the US with smaller stores regularly driven out of business.

The takeover breaks up a previously agreed merger between Asda and Kingfisher, the stores group which runs Woolworths, B&Q, Superdrug and Comet. Kingfisher is unlikely to match the terms of the Wal-Mart bid.

Asda, which already claims to be the lowest-priced major supermarket in the UK, said it was delighted with the deal. Archie Norman, the Asda chairman and Conservative Party chief executive who will net around pounds 6m from shares and options from the takeover, said. "We are delighted at the prospect of joining Wal-Mart. We have modelled the turnaround of this business on Wal-Mart's success in the US. In many ways this is like coming home."

Wal-Mart said it would keep the Asda name but did not rule out rebranding the stores under the Wal-Mart banner in the longer term. The company did not say that it would immediately cut prices though Allan Leighton, Asda's chief executive said the combined buying power of the two companies should mean better deals for consumers in the longer term.

News of the Wal-Mart invasion sent shares in UK retailers plunging. "This is probably the nightmare coming true," said Richard Hyman of Verdict retail consultants. "Retailers here are scared of Wal-Mart."

Shares in Tesco and Sainsbury fell sharply on the news. Some analysts said groups like Safeway and Somerfield could be pushed into mergers of their own, while smaller chains could be forced out of business altogether.

The Wal-Mart deal comes at a difficult time for Britain's major supermarkets. They are already facing an investigation into high prices by the Competition Commission. The Government has also made regular comments about how much cheaper certain goods are in the US and Europe than in Britain.

The deal caps a remarkable recovery for Asda which was on the brink of collapse in 1992.

Wal-Mart was founded by Sam Walton in 1962 in Bentonville, Arkansas. The company has expanded rapidly and now has annual sales of pounds 85bn from over 3,600 stores. The company started expanding in Europe in 1997 when it bought a chain in Germany.

There was some criticism of the takeover yesterday. Shop unions said it was worried about the prospect of job losses. Clive Vaughan, at the retail consultants Retail Intelligence, said Wal-Mart's low prices could drive competitors out of business, leading to a reduction in consumer choice. "Do we want Wal-Mart to take over the world?"

Other experts said that although Wal-Mart's prices were low, the choice within individual ranges was sometimes limited.