No relief for retailers, warns Asda: Norman says that food margins will remain under pressure despite sharp recovery in profits to pounds 84m

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The Independent Online
NO LET-UP is in sight in the tough trading conditions facing food retailers, Archie Norman, the chief executive of Asda, the supermarket group, has warned.

Mr Norman, recruited in December 1991 to revive the struggling group, was one of the first supermarket chiefs to warn, six months ago, that the halcyon days of food retailing were over because of overcapacity in superstores and price discounting.

'Compression of margins will continue and it is inevitable that discount operators will double their market share over the next couple of years. Our prices will move to match those of other retailers,' he said yesterday.

Mr Norman, whose earlier remarks anticipated a slide in supermarket shares, was speaking as Asda reported a sharp recovery in profits before tax and exceptional items from pounds 46.1m to pounds 83.9m in the six months to 13 November.

Asda is in the second year of a three-year recovery programme put in place by Mr Norman. This has included two rights issues, raising more than pounds 700m, disposals and closures of non-food retailing businesses together with hefty write-downs of property and a pounds 200m provision to cover extensive revamping of Asda's underperforming 200- strong chain of stores.

The profit improvement reflected a 14 per cent increase in operating profits at Asda to pounds 105m and a substantial fall in interest charges from pounds 51.9m to pounds 7.9m in the wake of the rights issues. Net borrowings, more than pounds 1bn in 1991, are now down to pounds 55.3m.

The stock market was pleasantly surprised by the profit performance. A sales increase in Asda stores of 9 per cent to pounds 2.45bn was larger than forecast.

'We have opened no new stores during the period - all the sales gain has come from existing stores. The results are in sharp contrast to the competition, who are showing sales rises of 1 per cent or 2 per cent from their existing stores,' Mr Norman said.

There was some disappointment with an interim dividend increase of 10 per cent to 0.55p - some had forecast as much as 0.7p - and after rising 3p to 58p initially Asda shares closed 1p up at 56p.

'Asda is a unique story in the food retailing sector because it is still in a recovery mode in a big way,' Paul Smiddy, analyst at Nomura Securities, said.

Reported profits included an increased loss of pounds 14.4m from Allied Maples, its carpets and furnishings business. Earlier this week Asda announced that it had sold Allied Carpets to Carpetland in return for forming a joint venture in which it will hold 40 per cent.

Yesterday Asda said that Maples had been sold in a management buyout financed by CINVen, the venture capital company, which is investing pounds 3.3m.

Mr Norman said customers had been returning to Asda in a steady trickle since the recovery programme was put into place. This he attributed to a better range and quality of product, improved older stores and a renewed organisation and infrastructure.

Asda cut produce prices aggressively in the autumn of 1992 together with a drive for higher quality and has been rewarded with a 29 per cent increase in the volume of fruit and vegetables sold, traditionally a weak area for the company. Fresh meat and poultry sales had increased by more than 10 per cent.

Asda's gross margin, the difference between buying and selling prices, had fallen by a little under one percentage point, Mr Norman said, but an 8 per cent increase in staff productivity had led to improved net margins.

Renewal of Asda stores, which cost pounds 3m a time compared with new store costs of up to pounds 25m, so far covers 32 of its 200 stores.

A new 43,000 sq ft superstore has been opened in Huddersfield, replacing a 20-year-old store, and Asda is accelerating its programme of new and replacement site development.

Two further Dales wide-range discount stores were opened in the South-east. Results have encouraged Asda to plan for four more openings in the next six months.

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