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

ASDA has just opened an out-of-town shopping centre in the delightful- sounding Manchester suburb of Dumplington. As the unfortunate name might suggest, the new store - one of six Asda plans to open this year - lies within sniffing distance of the local sewerage works.

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

Start your day with The Independent, sign up for daily news emails
Life and Style
Living for the moment: Julianne Moore playing Alzheimer’s sufferer Alice
health
News
Jay Z
businessJay-Z's bid for Spotify rival could be blocked
News
The spider makes its break for freedom
VIDEO
Voices
A propaganda video shows Isis forces near Tikrit
voicesAdam Walker: The Koran has violent passages, but it also has others that explicitly tells us how to interpret them
Sport
Ashley Young celebrates the winner for Manchester United against Newcastle
footballNewcastle v United player ratings
Arts and Entertainment
books
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Reach Volunteering: External Finance Trustee Needed!

Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

Christine McCleave: FP&A Analyst

£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Day In a Page

War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

Baghdad fights to win back Tikrit from Isis – but then what?

Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable
Living with Alzheimer's: What is it really like to be diagnosed with early-onset dementia?

What is it like to live with Alzheimer's?

Depicting early-onset Alzheimer's, the film 'Still Alice' had a profound effect on Joy Watson, who lives with the illness. She tells Kate Hilpern how she's coped with the diagnosis
The Internet of Things: Meet the British salesman who gave real-world items a virtual life

Setting in motion the Internet of Things

British salesman Kevin Ashton gave real-world items a virtual life
Election 2015: Latest polling reveals Tories and Labour on course to win the same number of seats - with the SNP holding the balance of power

Election 2015: A dead heat between Mr Bean and Dick Dastardly!

Lord Ashcroft reveals latest polling – and which character voters associate with each leader
Audiences queue up for 'true stories told live' as cult competition The Moth goes global

Cult competition The Moth goes global

The non-profit 'slam storytelling' competition was founded in 1997 by the novelist George Dawes Green and has seen Malcolm Gladwell, Salman Rushdie and Molly Ringwald all take their turn at the mic
Pakistani women come out fighting: A hard-hitting play focuses on female Muslim boxers

Pakistani women come out fighting

Hard-hitting new play 'No Guts, No Heart, No Glory' focuses on female Muslim boxers
Leonora Carrington transcended her stolid background to become an avant garde star

Surreal deal: Leonora Carrington

The artist transcended her stolid background to become an avant garde star
LGBT History Month: Pupils discuss topics from Sappho to same-sex marriage

Education: LGBT History Month

Pupils have been discussing topics from Sappho to same-sex marriage
11 best gel eyeliners

Go bold this season: 11 best gel eyeliners

Use an ink pot eyeliner to go bold on the eyes with this season's feline flicked winged liner
Cricket World Cup 2015: Tournament runs riot to make the event more hit than miss...

Cricket World Cup runs riot to make the event more hit than miss...

The tournament has reached its halfway mark and scores of 300 and amazing catches abound. One thing never changes, though – everyone loves beating England
Katarina Johnson-Thompson: Heptathlete ready to jump at first major title

Katarina Johnson-Thompson: Ready to jump at first major title

After her 2014 was ruined by injury, 21-year-old Briton is leading pentathlete going into this week’s European Indoors. Now she intends to turn form into gold
Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot