Asda's prices get `lost in the fog'

Investment: The supermarket group wants to re-establish itself as a value brand
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ASDA YESTERDAY admitted it was being affected by the slowdown in the supermarket sector and said its price proposition had become "lost in the fog" of heavy promotional activity by rivals.

Reporting a modest 4 per cent increase in half-year profits to pounds 197.7m and like-for-like sales growth of 3.5 per cent, Asda conceded it had made mistakes. "This has been the year of the BOGOF (buy-one-get-one-free," said Allan Leighton, Asda's chief executive. "The impression has been that everything has been on sale all the time. The net effect on consumers is that they are very confused about what is good value and what isn't. We haven't been able to differentiate ourselves from others sufficiently."

To fight back, Asda will move away from promotions towards a policy of everyday low prices with a differential of 10-15 per cent on rivals. "Tough times are here again so this a great time to be the value brand in the industry," Mr Leighton said.

As part of its price campaign Asda has relaunched its Farm Stores value brand on 400 items. It is also pushing its Big Saver brand of 120 lines of larger, value packs aimed at family shoppers.

Analysts said the risk for Asda was that high-profile price campaigns by rivals would swamp its price position. "People might not notice the difference," said Mike Dennis at SG Securities.

There is also a concern on margins, which dipped slightly on last year, though Asda said the margin should be maintained because of a shift in the margin mix across the store.

Some analysts doubt Asda's analysis that consumers are "confused" about the plethora of promotions. They say Asda might have been out-marketed, or that its systems cannot cope with the huge surges in volume generated by buy-one-get-one free deals.

Separately, Asda is embarking on its biggest ever expansion programme and yesterday announced the purchase of five superstores from the Co-op.

This will give Asda a total of 17 new stores next year and a combined capital expenditure programme of pounds 580m.

Analysts foresee a difficult year ahead and are sceptical about possible interest in Asda from Wal-Mart, the US retail giant which is keen on expanding in Europe. Archie Norman, the Asda chairman, also played down the possibility of a link-up yesterday, saying: "The last time I spoke to Wal-Mart was four and a half years ago."

Asda shares, which have weakened from 218p in the spring, rose 6.5p to 154p on the results. Assuming profits of pounds 410m for the full year, the stock trades on a forward rating of 14. "Until the `fog' clears, they are unlikely to make much progress," one analyst said.