Wal-Mart set to squeeze UK supermarket prices

The US giant taking over Asda will force the other food stores to sharpen up. By Hilary Clarke

h the mighty power of America! By snatching supermarket chain Asda from under the nose of Kingfisher, the US shopping phenomenon Wal- Mart, the biggest retailer in the world, last week achieved what the Office of Fair Trading has been trying to do for more than a year. The friendly takeover will instantly force British supermarkets to bring down their prices, which are currently among the highest in Europe.

Current estimates put the likely fall in the British shopper's weekly supermarket bill at around five per cent.

Wal-Mart certainly has deep enough pockets to maintain a price war until it achieves its stated aim of beating both Tesco and Sainsbury to the number one slot in the UK. Wal-Mart's global sales in 1998 of $137bn equated to one tenth of Britain's entire economic output in the same year.

The pressure on prices will reduce the need for legislation, believes Steve Woolf, retail analyst with Paribas.

"Politically, supermarkets have been a very easy target over the last 18 months," he says.

"Wal-Mart will hopefully take the heat off if they introduce a price war. The customer will be better off, and it takes pressure off of the Government to make legislation that would be unpopular in the sector."

Even so, the arrival of Wal-Mart signifies the realisation of the worst fears of the likes of Sainsbury, Tesco and Safeway, which will have to sharpen up their act to survive the pressure on their operating margins. They will have to make sure they find a different niche, like emphasising the quality of their products, say analysts. But that's not so easy with food.

"A can of beans is a can of beans, even if it has a different wrapper. It's not like ties, which can be priced from pounds 10 to pounds 120," says Mr Woolf.

However, the impending price battle is unlikely to centre on food and drink. Asda has already promised to maintain its "Backing Britain" policy, introduced at the end of last year, and by which it will spend at least pounds 400m buying British produce over the next three years.

Moreover, Wal-Mart's stated aim in expanding abroad has been to increase its global market share of non-food businesses.

Asda will henceforth be able to offer Wal-Mart's rock-bottom prices in essential non-food items like toiletries and pharmaceuticals. Wal-Mart can cut cheap deals with suppliers because of its sheer size.

For example, 20 per cent of Procter & Gamble's Pampers nappies globally are sold through Wal-Mart stores, and Wal-Mart accounts for around 15 per cent of Procter & Gamble's global sales and about the same amount of Unilever's.

To give an idea of how important big retailers relationships are with multinational companies, Tesco currently accounts for 20 per cent of Unilever's sales in the UK. Wal-Mart's arrival will be bad news for the main UK multiples, but also for companies like Boots and Kingfisher, which owns Superdrug and Woolworths.

But the shares that fell the most following the announcement that Wal- Mart was to buy Asda was the discount clothing company Matalan. On Friday, Matalan tried to put a brave face on things by issuing a statement welcoming the arrival of Wal-Mart in Britain, saying: "It will encourage growth in the value sector as a whole."

British retailers aren't the only ones under threat from Wal-Mart. Europe's retailing elite is also nervously watching events in the UK.

"Wal-Mart can use UK as a further stepping stone into Europe," says another City analyst. The fear is, once established here, Wal-Mart can start to shop around for another retailer to buy in mainland Europe. Indeed, Wal-Mart has already helped provide the catalyst for the ongoing consolidation of Europe's big retailers.

Since the American giant first entered the European market in December 1997 with the acquisition of Wertkauf - the 21-strong hypermarket chain in southern Germany - it has also snapped up 74 stores from Spar Handels.

Its rapid expansion has sparked a vicious price war in Germany, pushing down food prices there. Wal-Mart's growth rate - opening the same trading space per year as Tesco, Safeway and Sainsbury put together - is an awesome one for its European rivals, as much as it is for its British ones.

But the market Wal-Mart cherishes most now that it has gained a secure foothold in the UK - France - will probably be tougher to crack. The French are likely to resist any friendly takeover of one of their retail chains such as Promodes, tooth and nail, says Riet Vijgen, a retail analyst with the Belgian stockbrokers Puilaetco.

"The competition in Europe is not going to allow Wal-Mart to walk all over them," says Clive Black, an analyst at CCF Charterhouse in London.

Just as a possible outcome of last week's news here could be what Mr Woolf described as a "mercy merger" between two of the big UK supermarkets, more consolidation is likely in Europe as a result of Wal-Mart's arrival.

Whatever the outcome, Wal-Mart seems certain to put off any potential predators from Europe homing in on the UK market.

While hitherto high profit margins in Britain made the UK an attractive prospect for many European retailers like Holland's Ahold, "A lot of groups will be questioning whether they have to be in the UK with Wal-Mart here. They will ask themselves: `Is it worth fighting someone like Wal-Mart on UK soil?'" says Mr Woolf.

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