Asda set to overtake Sainsbury's in war of the supermarkets

The US retail giant Wal-Mart has provided its British chain with the buying power to grow market share faster than rivals

This Christmas, a remarkable thing will happen in the UK supermarket business. Asda, which not long ago was ranked as Britain's fourth-largest grocer, will overtake J Sainsbury to take the number two slot, behind Tesco.

It will only be a temporary victory as Asda does particularly well over the festive season and Sainsbury's is expected to bounce back in the early part of next year. But soon, and perhaps as early as next summer, Asda is expected to usurp Sainsbury's permanently and begin to pull away.

The industry data speaks for itself. Figures compiled by the research group Taylor Nelson Sofres show that in the 12 weeks to 15 September Asda had 16.2 per cent of the UK grocery sector compared with Sainsbury's 17.2 per cent. This shows remarkable growth in just two years. In August 2000, Sainsbury's was well ahead with a share of 17.6 per cent compared with Asda's 14.3 per cent.

Current trading figures show that Asda's underlying sales are rising by about 9 per cent, compared with 2.4 per cent recorded by Sainsbury's and 3.9 per cent by Tesco.

The message, then, is not that Sainsbury's is losing share. It is just not gaining it. Meanwhile the omnivorous hypermarkets of Tesco and Asda continue to hoover up sales from the second division players such as Iceland, Somerfield and the Co-op as well as the dwindling number of independent operators.

Sir Peter Davis, Sainsbury's chief executive, was remarkably honest about the rise of the Wal-Mart-owned Asda last week when the company reported its second-quarter trading update. "People talk about Tesco, Sainsbury's and Safeway because they are the quoted companies," he said. "But they forget about Asda. And it is Asda that is providing the dynamics of the market."

Asked how he felt about being toppled as number two, Sir Peter said Sainsbury's was halfway through a "business transformation" process and that only using a single yardstick could be misleading: "For us at the moment, market share is just one part of how we judge ourselves," he said. "It would be easy to invest to gain sales and share. But it is important not just to have sales growth but profit growth too."

Asda too claims it is not obsessed by market share, though it is clearly gleeful about its rise up the rankings. An Asda spokesman said: "It is not a goal for us to overtake Sainsbury's. But if that is a by-product of getting things right for the customers then we are pleased."

And then came a grim warning for rivals: "We've made a start. But we are not where we'll be in three or four years time."

Of course there has been much speculation that Wal-Mart, which acquired Asda in 1999, might bid for Safeway. Though rivals, and most analysts, see this as unlikely, Wal-Mart could present a case to the competition authorities that a deal could help deliver even lower prices to UK consumers than its ownership of Asda has so patently done already. For example children's fleeces start at £3.50 and microwaves at £39.99.

So how has Wal-Mart driven Asda to the dizzy heights it now occupies? Low prices are a key factor, of course. But it is the way Asda has achieved this that tells an interesting story. It is a tale of huge buying power, a different approach to merchandising, new formats and IT systems that are regarded as the best in the industry.

Perhaps the single most important factor in Asda's rise is the introduction of joint sourcing in non-foods between Asda and Wal-Mart, which is the world's biggest retailer. Joint buying was first introduced in October last year on products such as microwaves, personal stereos and toy ranges such as Kids Connection, which is a Wal-Mart brand. Asda's cheapest kettles, toasters or irons are now priced at £7.97 with like-for-like sales of these items up by about 30 per cent.

Asda has also applied Wal-Mart's huge buying muscle to the sourcing of raw materials such as the material used to make fleeces. Asda was quoted $9 a metre for 50,000 metres of material for its George clothing label. Wal-Mart, which used the same supplier, was buying about 6 million metres from the same source for just $3 a metre. Asda was able to gain the same terms, which helps explain why children's fleeces start at £3.50.

Asda says the relationship is not just a one-way street. The George label has been introduced in the United States and will be trialled in other international markets next year.

Then there is the range re-adjustment. Asda has reduced the amount of space it devotes to food in its stores to make more room for higher-margin non-food ranges such as clothing and electrical appliances.

Food suppliers say Asda has also reduced the number of lines it will carry in a particular category. In return for bigger orders of the remaining lines it will ask suppliers for lower prices. Asda claims it has actually increased the number of lines by stocking less of lower-selling ranges. "There is more choice in the store," a spokesman insists.

One food supplier says: "They will take a view on a particular category and drive it until they reach whatever target they have set. They don't ask for lower prices up front. But they go back to the supplier later and remind them that they would like some of the gains from bigger orders passed back to them in the form of lower prices. But they take the margin hit to start with, which is different to the approach of some other supermarkets."

Another plus for Asda is that it has been hooked up to Wal-Mart's IT system called Retail Link since March 2000. This gives all suppliers access to information that is so detailed it can show how much of a particular line has been sold in every branch with the information updated every 15 minutes. This will be extended to include Asda's depots by Christmas enabling suppliers to know how much of their stock is in each depot, how much is on vans and where the vans are at any time using a tracker system.

Asda's pressure on suppliers can go too far. One maker of desserts collapsed into administration earlier this year and others have become financially stretched. One major food supplier to Asda says: "They are aware that they can't push things too far. They rely on these suppliers and they want to build long-term relationships."

Industry experts say not all of Asda's success is due to Wal-Mart. Andrew Fowler, a retail analyst at Merrill Lynch, says: "Archie Norman and Allen Leighton [the former chief executive] re-invented Asda 10 years ago and in many ways Wal-Mart has simply carried on what they started. It was those two who returned Asda to its core values: 'it's cheap, its cheerful, it's in your face' and they knew its customers loved it."

How far can Asda go? Analysts say it is highly unlikely that Asda could ever catch Tesco without a major acquisition. They also say that Asda is currently enjoying the first full benefits from joint-buying with Wal-Mart and the current rates of sales growth cannot continue.

"It can't stay this good forever," one says. "You would expect it [the growth] to settle down."

Wal-Mart believes the biggest restraint on Asda's growth is that it can not physically fit more non-food merchandise in its UK stores, which are small compared with its US monoliths. "They have started to dig out basements and experiment with putting a mezzanine layer in but these things are very expensive," another analyst said.