Wal-Mart roll-back hits high street

City analysts are overhauling their retail ratings as Asda unveils another £37m in price cuts
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The Independent Online

CHRISTMAS MAY BE touted as the season of goodwill, but it is fair to assume it will be in short supply among Britain's supermarket giants in the weeks ahead.

CHRISTMAS MAY BE touted as the season of goodwill, but it is fair to assume it will be in short supply among Britain's supermarket giants in the weeks ahead.

The leading players - Tesco, J Sainsbury, Safeway, Somerfield/Kwik Save and Wm Morrison - are bracing themselves to beat back a continued competitive onslaught from Asda, the country's third-largest chain, which was picked up for £6.6bn last summer by Wal-Mart, the world's largest retailer.

The latest headline-grabbing salvo from the 230-store group was fired yesterday. Asda trumpeted a further £37m in price cuts, 10,000 new part-time jobs to cope with an expected jump in seasonal demand and the promise of 24-hour opening at 80 of its outlets in the immediate run-up the millennium.

Richard Baker, Asda's marketing director, described the package of initiatives as helping to make Asda "the best shop in town".

Competitors and investors may disagree with Mr Baker'sclaim, but three months after the Asda/Wal-Mart deal many are still scrambling to assess the impact the newest kid on the block will have on UK retailing.

Analysts' initial conclusions range from a near-apocalyptic outlook for Asda's competitors as margins wither and customers desert their stores, to a more benign picture of fewer, stronger rivals flourishing alongside the US-owned challenger.

Much of the debate centres on the consequences that flow from the first of Asda's moves - further price cuts, which the group calls "roll-back". In recent months, the main British players have responded by trimming their own prices and consumers can expect the reductions to keep on coming. The roll-back concept lies at the heart of the Wal-Mart philosophy for driving growth. Put simply, the Arkansas-based leviathan believes cheaper goods generate more cash in increased volumes of sales, than is lost in slimmer product margins.

"The overriding obsession at Wal-Mart is with maximising the sales line and dollar profits. The vehicle that the company uses is roll-back - a price reduction designed to stimulate sales and gross cash profit at the expense of margin," Salomon Smith Barney concluded after two days huddled with the company's management in the American Mid-West. "The company would prefer to see a continuation of roll-back, inflicting death by a thousand cuts on its competitors."

Asda claims the Wal-Mart strategy is working, with about £200m worth of roll-back cuts applied so far to 3,000 lines, split roughly 50-50 between food and non-food items. Yesterday's offerings predictably highlighted own-label Christmas puddings at £4.49 (£5.49), Cadbury's Milk Choc Biscuit Barrel at £5.49 (£5.99) and 70cl Strathayr Whisky for £6.99 (£7.49).

As a result of the campaign, Asda says sales are rising as it attracts more customers. Quoting data from market analyst Taylor, Nelson Sofres, it maintained yesterday that there was a 6 per cent rise in the number of Asda shoppers over the last quarter, with a 12 per cent jump last month. Rivals may dispute the exact figures, but agree about the heightened challenge.

Wal-Mart underpins its drive towards lower prices with its massive buying power, negotiating cost-effective deals from suppliers backed by its position as the world's largest retailer.

"Wal-Mart expects to get the best buying terms in each of the countries where it operates, even though it may not be the market leader," the Salomon report said. "The company expects this because, over the longer term, it aims to be 'the cheapest to serve'."

What hope, then, is there for its high street rivals? Research this month from Dresdner Kleinwort Benson, which acted as Wal-Mart's broker during the Asda takeover, paints a sombre, if varied, picture. "By reducing prices across [food, household goods, health\ beauty and entertainment] product categories, Asda should gain significant market share," the DKB report said. "Our conclusion is the medium-term risk to profitability at each of the quoted food retail competitors, which results from the change in Asda's pricing power."

Safeway was ultimately seen falling to a rival group and rated a "sell"; Tesco had yet to prove itself abroad and faced a tougher ride at home, and was tagged "reduce" and Morrison and Somerfield were both labelled as "hold".

Sainsbury's , which last week re-shuffled its beleaguered management team, came out top of the pile as an "add". The DKB report said: "While the fundamentals look difficult, Sainsbury looks an attractive asset base given the strength of its UK brand and the value of its store locations."

Its Wal-Mart assessment also highlighted increased competitive pressures for non-food retailers, including Boots ("hold" to "reduce"), GUS ("buy" to "add") and WH Smith ("buy" to "hold"). Kingfisher, insulated by non-UK sales and income from DIY and consumer electronics operations, was rated a "buy". M&S came in as a "hold".

Not all the news is bad, however. The Salomon team argued that there were limits to the extent of price cuts that Asda would want to push through, and highlighted Wal-Mart's relative inexperience in food retailing.

"Wal-Mart executives were surprised by the concern of some UK analysts that they intended to destroy the profitability for UK supermarkets," Salomon said. "Wal-Mart management cannot afford for the [Asda] deal to fail. It is no surprise that the management do not want an all-out price war in the UK. Asda claims price leadership already, and will defend that position..."

It also pointed out that in Wal- Mart's home market, competitors managed to survive alongside the US leader and the same pattern should be repeated on this side of the Atlantic.

"As [Wal-Mart] management were quick to point out, there are a lot of other retailers in the US. They clearly admire and respect Tesco and Wm Morrison, and we expect these two companies to do well in the new 'Wal-Mart environment' in the UK."

Consumers and investors can expect a tough battle in the months ahead, characterised by lower prices and high-profile industry consolidation. But many of the UK players will rise to meet the challenge.