Is there still shelf life in Asda?
Bigger - and cheaper - has been better so far. But the chain's growth strategy may have its limits
Sunday 03 September 1995
For all the olfactory distractions, Dumplington was packed last Saturday evening. Friendly staff were on hand to help lost customers locate the lamb chops and loaves of bread. Alas, the superstore had run out of such basics as mushrooms, garlic and pints of fresh milk.
Teething problems with suppliers perhaps; the result of booming business, maybe. Either way, the shortages indicated that for all Asda's pretensions to be different from its rivals, all supermarkets can suffer from the same familiar ailments.
One area where Leeds-based Asda does stand out, however, is in terms of share price performance. Investors brave enough to back Archie Norman when he joined as chief executive from Kingfisher almost four years ago have been amply rewarded. From a low of 22p three years ago, the shares have soared to 109p. But after such a strong run, the turnaround story may now be in the price.
A cautious stance on the shares is not to deny the Asda success story. Pre-tax profits of pounds 246m in the year to April 1995 represented a three- fold increase in just three years. The 8.4 per cent rise in like-for-like sales last year was the best in the food retailing sector, justifying Mr Norman's strategy of going back to Asda's roots by competing on price in a low-inflation climate and chasing market share at the expense of margins.
Shopping-basket surveys regularly show that Asda is cheaper than J Sainsbury and Tesco - the retailers Asda most likes to be compared with.
Asda's adoption of the unfashionable philosophy that big is beautiful has also paid off. Its stores cover an average of 40,000 square feet - more than half as much again as Tesco and Sainsbury. The extra space allows Asda to offer a wider range of goods, and over the next three years, higher- margin areas such as fresh food, own-label and non-food items, including clothes, books and toys, will be added. Further gains should come as more stores are refurbished and computer systems are introduced.
With hindsight, Asda's approach of offering low prices and a broader product range was perfectly timed and ideally pitched to see off the threat from the discount stores. In this sense, investors were right to buy the shares ahead of other superstores as the sector returned to favour during the past year. The question now is , how much more growth can be squeezed out of the existing format?
Bulls of the stock argue any sign of trading up in a more benign retail climate should benefit Asda, because it is expanding its range most rapidly. Profits, therefore, are most geared to any increase in sales. Growth should also come as Asda increases the ratio of sales per square foot - the lowest in the sector.
But critics argue that Asda's absence from city centres means that the company will find it difficult to lure better-off and, therefore, higher- spending shoppers away from accessible urban locations such as the Tesco Metro stores.
Nor is it clear whether loyal customers will make the cultural leap of associating out-of-town shopping centres with department stores of old, where just about everything can be bought under one roof.
There are also fears that Asda might embark on the acquisition trail to keep growth going.
Although a bid for its local rival, Wm Morrison, might run into monopoly problems, some of the Somerfield estate, which takes in the old Gateway stores, cannot be ruled out.
Asda's recent decision to buy out British Aerospace from its Burwood House retail property joint venture adds around pounds 350m of borrowings to the balance sheet. But taking on debt is unlikely to hinder any expansion plans, as gearing is still low at about 20 per cent of shareholders' funds, and Asda is generating pots of cash.
These strategic uncertainties should make investors pause before pushing the shares any higher. Certainly, the 14 per cent premium to the market is becoming increasingly hard to justify now that the recovery story looks played out. Perhaps the best option is to pocket the difference and bag some profits.
Asda Share price 109p Prospective yield 2.9% Prospective price-earnings ratio 16 Dividend cover 2.7
1994 1995 1996*
Sales pounds 4.88bn pounds 5.29bn pounds 5.68bn Pre-tax profits pounds 183m pounds 246m pounds 282m Earnings per share 4.4p 5.9p 6.7p Dividend per share 1.8p 2.2p 2.5p * Panmure Gordon estimates
- 1 Half of young women unable to ‘locate vagina’ and 65% find it difficult to say the word
- 2 Emma Watson on Jennifer Lawrence naked photo leak: 'Even worse than seeing women's privacy violated is reading the comments'
- 3 Saudis risk new Muslim division with proposal to move Mohamed’s tomb
- 4 A teacher speaks out: 'I'm effectively being forced out of a career that I wanted to love'
- 5 Mexican woman becomes world’s 'oldest person' at 127
Perez Hilton apologises for publishing Jennifer Lawrence naked 4Chan photos
Jennifer Lawrence 'nude photo hacker' claims there are hundreds more celebrity images to come
Victoria Justice on naked photo leak: 'Let me nip this in the bud right now – pun intended'
Ariana Grande nude photos leak: Pictures are completely fake, say representatives
Saudis risk new Muslim division with proposal to move Mohamed’s tomb
Rotherham child sex abuse scandal: Labour Home Office to be probed over what Tony Blair's government knew - and when
What do immigrants really think of Britain? Polish immigrant's Reddit post goes viral
Ashya King: Parents of five-year-old boy refused permission to visit him in hospital and denied bail at Spanish court
With Douglas Carswell joining Ukip, my party has taken another giant step forward
When elitism grips the top of British society to this extent, there is only one answer: abolish private schools
Ashya King: 'Cruel NHS has not given us the treatment we need', says father of five-year-old with brain tumour who fled to Spain
iJobs Money & Business
£55000 - £65000 per annum: Harrington Starr: A Global Financial Service Organi...
£60000 - £70000 per annum: Harrington Starr: A prestigious leading professiona...
£40000 - £50000 per annum: Harrington Starr: A Global Financial Service Organi...
£50000 - £70000 per annum: Harrington Starr: One of the global leaders in prov...