Asda chief warns of over-expansion: Supermarket group's profits well ahead of forecast

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FOOD RETAILERS' shares took fright yesterday after Archie Norman, chief executive of Asda, the supermarket group, warned of increasing pressure on industry profits because of price discounting and over-building of large superstores.

'The halcyon days are over. You cannot expand the number of superstores indefinitely without hitting margins and profits. I have been saying this for months and more and more people have now come to agree with me,' he said.

Mr Norman's warnings accompanied full-year results from Asda showing a rise in pre-tax profits from pounds 86.8m to pounds 140.4m in the year to 1 May, well ahead of the pounds 130m forecast it made when launching a pounds 347m rights issue in January, its second in 16 months. The dividend is 1.6p with a final of 1.1p.

Mr Norman joined Asda from Kingfisher, the Woolworths and B&Q retailing group, in December 1991. He was brought in after John Hardman, former chairman and chief executive, left Asda, then struggling under a pounds 1.1bn debt burden. Borrowings are now pounds 76m.

Asda's own share price closed the day 6p lower at 65.5p, as the stock market digested Mr Norman's remarks. Shares in J Sainsbury were marked 12p down at 467p, Argyll, owner of Safeway, fell 8p to 317p and Tesco dropped 4p to 211p.

Worries about saturation or over- building of superstores and the growth of price discounters led by Continental European operators such as Aldi, have depressed supermarket shares, with the exception of Asda, all year. Up to the end of June food retailing shares underperformed the stock market by 13 per cent, with Tesco and Argyll being most out of favour.

Asda's sharp improvement in profits, from a low base, has been achieved by a 'value-for-money' pricing policy, greater emphasis on fresh foods, where it lags behind Sainsbury's, Tesco and Safeway, and an attack on costs resulting in a 13 per cent improvement in profitability.

Turnover rose by 4 per cent to pounds 4.3bn, adjusting for an extra week's trading in 1991/92. Asda price inflation was 1 per cent, which implies that volume of goods sold rose by 3 per cent.

Mr Norman said that like-for-like sales growth, allowing for store openings and closures, had accelerated from 1 per cent in the first half of its financial year to 3 per cent for the year as a whole.

This sales growth had been bought at only a fractional reduction in the gross margin, or the difference between buying and selling prices. Net operating margins rose slightly from 4.3 per cent to 4.5 per cent.

Profits were hit by a further pounds 7.9m loss at Allied, its carpet and furniture subsidiary, exacerbated by a pounds 3.8m deficit at Maples, which also required a pounds 6m provision for future rationalisation including store closures.

Mr Norman said that Asda would be aiming for productivity gains of 4 to 5 per cent a year in order to hold costs down. Up to 40 of 200 stores will be 'renewed' this year after an initial experiment with three yielded average sales gains of more than 20 per cent.

'We fully expect industry profitability to come under increasing pressure as the discount sector grows and superstore saturation develops. Our strategy is designed to create a business which will be robust in tomorrow's environment.'

Bill Myers, food retailing analyst at Henderson Crosthwaite, said that pressure would build in the industry but while this would prove lethal for some, others would cope with the changes.