Analysis: How has Asda pushed profits up?

Asda chief financial officer Richard Mayfield will have had a pleased expression on his face in pressing ‘send’ in submitting the grocer’s accounts to Companies House this week. The accounts for 2011 show sales at Asda were £21bn last year, up from £20.5bn in 2010, while like-for-like sales, excluding petrol and VAT, rose 0.5%.

The grocer has continued its momentum in 2012. In February, chief executive Andy Clarke declared the retailer had “won” Christmas and reported positive like-for-likes in the first and second quarters, albeit recorded a slowdown.

Planet Retail grocery analyst David Gray believes that a shift in Asda’s products and pricing has won them custom. “They have major improvements to their food quality,” he says. “They relaunched Chosen by You and their own brand is really good. Asda are extremely competitive on price and consumers have a bit more trust in Asda than Tesco as they have a bit more transparency.”

Asda’s low pricing stratgy is also chiming with consumer sentiment, as shoppers continue to seek out value in their food shops.

However, the accounts also revealed that the conversion of Netto’s 147-store UK business, acquired for £752m in 2010, had led to a £31.4m loss.

Asda said the losses were “planned” and the stores have traded ahead of expectations, according to an Asda spokeswoman.

It is understood that sales at Morrisons stores in the same locality as the newly-converted Asda Supermarkets are suffering as a result. However, Clarke has been cagey over expansion plans for the format.

Gray says: “They did a good job with the conversions. Asda have kept a lot of Netto’s rotating non-food spot deals which drive footfall.

“Asda will be looking more at smaller stores going forward, they will be opening fewer hypermarkets. There is potential to open real convenience stores in town centres but its harder to maintain that lower price.”

However, it’s not all plain sailing at Asda House. The Leeds grocer remains exposed to the difficult non-food market – particularly at its Asda Living format where expansion has been slowed – and the first signs that arch-rival Tesco’s turnaround is beginning to work were revealed on Wednesday as like-for-likes there, as well as at Sainsbury’s, were positive.

But while competition remains fierce and consumer conditions tough, Asda remains defiantly on song.