‘Supermarket share price rout is testament to Asda’s turnaround potential’

Supermarket share prices were sent into a tailspin this week for what just months ago would have seemed an unlikely reason – the serious prospect of an Asda revival.

Asda’s annual results sparked an 8% fall in Sainsbury’s share value over the last five days, while Tesco is down nearly 14% over the same period. Quite the impact from an update by a grocer that has not been at the top of its game for several years.

That’s at the heart of the issue though. At last, following the return to Asda of Allan Leighton who made his name alongside now-Marks & Spencer chair Archie Norman for his part in the legendary turnaround of Asda in the 1990s, the grocer is starting to recover its mojo.

Despite its recent travails, Asda is not damaged beyond repair, so the possibility of a return to form is real and a spooked market reaction is evidence of the latent appeal of the Leeds grocer as well as fears of the implications.

The City jitters were a result of Leighton’s pledge to “undertake a substantive and well-backed programme of investment in price”. That sparked fears of a reckless price war in an intensely competitive market that operates on margins as lean as a packet of Asda’s wafer-thin ham.

Despite its recent travails, Asda is not damaged beyond repair

The fighting talk was accompanied by what – if Asda were a listed company – would have been a profit warning. Leighton preferred to call it an ‘investment warning’ but flagged that price cuts, along with investment in availability and shopping experience, will “materially reduce our profitability this year”.

While that commitment may have sparked City concerns about the implications on grocery overall, it was, however, also an indication of how much ground Asda has to make up. The latest Kantar data showed Asda’s market share down from 13.7% a year ago to 12.6%, while sales, in contrast to all its prime rivals, fell by 5%.

In the time that Asda has been misfiring, some competitors – notably Tesco and Sainsbury’s – have been on generally strong form, while value players Aldi and Lidl have continued to grow. Morrisons, like Asda, is still on a recovery journey and for that reason could be in more jeopardy.

There’s no reason to think that all won’t now double down on their strengths, such as in the case of Sainsbury’s and Tesco’s loyalty schemes, in expectation that Asda will up its game.

While price competition may intensify, does that mean the food retail market will be thrown into disarray? Not necessarily. Shore Capital’s CIive Black said: “We do not take a complacent stance but neither, we sense, will the listed players. Irrational contagion lowering gross margin and earnings is the greatest concern, but we need to remember too that the listed players are better grocers than Asda with a broader customer set, stronger balance sheets, and a will to remain competitive.”

In the time that Asda has been misfiring, some competitors – notably Tesco and Sainsbury’s – have been on generally strong form

Broker Jefferies said: “It remains far from clear whether Asda has the ability to commit to the scale of cuts outlined on Friday if volume growth does not improve measurably in the coming weeks and months”. It noted however that “until this evidence arrives, we expect sector valuations to remain pressured.”

So far, Asda’s price moves have been relatively cautious. The Rollback scheme, launched to great fanfare, only brings prices of products down for a limited period and Black wonders about the extent to which it is supported by suppliers. He observed: “We sense that Asda gained very little support from a sceptical supply chain for Rollback II, noting that its private label credentials by industry standards are low, it is not perceived as a very reliable customer, certainly not a partner.”

However, Asda’s latest initiative should not be underestimated, nor the potential for it to successfully reactivate its reputation as a consumer champion providing value for money.

For the time being, such hopes are all in the future. Asda is no spent force but for others the danger is real, but not yet present – and they will be determined to keep it that way. In the end, someone is ultimately going to lose out. Last week’s share price route looks overdone, but the fact it happened at all is in part testament to Asda’s enduring strengths.