‘Walmart’s Asda Price must be right to secure private equity backing’

The US retail giant had planned to merge its British grocery business with Sainsbury’s, only for the Competition and Markets Authority to kibosh that ambition in April last year.

Walmart then pursued plan B, investment from private equity houses as part of the path to an Asda IPO, before the coronavirus pandemic called an abrupt halt to those discussions.

Now, following Asda’s “resilience” during the health crisis, talks with “a small number” of interested parties are back on – and there is renewed confidence that Walmart will finally be able to exit the UK sooner rather than later. 

But to do so, Walmart’s Asda Price has to be right. The £7bn that Asda would have been worth in the Sainsbury’s merger may need to be revisited.  

Potential Asda suitors will not be getting carried away by the “resilience” that Walmart hailed this week.

“If you were building a food retail business today, it wouldn’t look like Asda. It has limited skin in the game in two of three big areas of growth – discount and convenience”

The grocer is operating in perhaps the most challenging retail market in the world. Food retailers may have benefited from increased basket sizes during the pandemic, at a time when consumers are eating and working more at home, but many of the tailwinds that have accelerated sales growth over the past few months will eventually subside.

Future growth, and return on investment for interested parties, will therefore not be easy to come by at a £7bn price tag. 

Simply put, if you were building a food retail business from scratch today, it probably wouldn’t look like Asda. It has limited skin in the game in two of three big areas of growth during the past decade – discount and convenience. 

Once upon a time, Asda’s price proposition made it hugely attractive to customers and differentiated it from its big four rivals. But the explosion of Aldi and Lidl on these shores following the 2008 financial crisis blew Asda’s chief USP out of the water. The cold hard truth is that it has been struggling to conjure up a new one ever since.

While rivals Tesco and Sainsbury’s embraced the convenience trend, opening hundreds of c-stores across the country, Asda stuck steadfastly to its large out-of-town supermarket model.

Admittedly, those locations have served it fairly well during the pandemic – its sales rose 11% in the 12 weeks to July 12, according to Kantar data released today. 

But alongside the return of the ‘big shop’, an increase in the number of consumers shopping in local neighbourhoods has allowed rivals such as Tesco, Sainsbury’s and the Co-op, all of which have convenience shops in locations closer to people’s homes, to grow at a much quicker pace.

Credit where it’s due, Asda’s top line has improved strongly over the past few years under the leadership of Sean Clarke and now Roger Burnley. The business is on a much firmer footing now than it was four summers ago, when it suffered eye-watering 7.5% like-for-like declines. 

But make no mistake about it – Asda is still playing catch-up as it bids to restore its former glories. 

“Interested parties will need to ask themselves: where are the growth opportunities? And can we afford the investment needed to exploit them?”

Private equity investment could be exactly what it needs to achieve that. Despite the backing of parent company Walmart, cash from the bank of mum and dad in Arkansas has dried up for Asda of late. Investment, instead, is being poured into markets such as India and China, where Walmart sees much larger scope for growth.

Interested parties will need to ask themselves the same questions Walmart has: where are the growth opportunities for Asda? And can we afford the investment needed to exploit them? 

A belated move into convenience could be a fruitful but expensive shift, particularly if it opted to grow that estate organically from scratch.

A swoop on a specialist c-store group or a supply deal could, conversely, give Asda an immediate and comparatively capital-light foothold in the convenience market.

Online offers an opportunity for a market share grab, although the economics of food ecommerce present persistent financial headaches that private equity groups may not be willing to bankroll for too long.

In clothing, Asda’s George brand is among the biggest in the UK and could pick up further sales amid the fashion shake-out sparked by the coronavirus pandemic. 

But such avenues for growth are far from straightforward and don’t offer private equity suitors guaranteed returns on investment.

Even after the peak of the Covid outbreak, during which grocers raked in additional sales, share price growth has been subdued    

Add a looming Brexit into the mix, and the disruptive impact that could have on pricing and supply chains, and a £7bn Asda could prove to be a tough sell, even to investors eyeing a swift IPO. 

That, in itself, offers no guarantee of a profitable exit strategy in the current climate. 

Even after the peak of the Covid-19 outbreak, during which grocers raked in additional sales, share price growth has been subdued.    

Tesco’s share price – 217.8p at the time of writing – is just 2.7% higher than it was on March 23, the day prime minister Boris Johnson put the UK into lockdown. 

Over the same time period, Morrisons has grown its share price 6.5% and is now worth £4.5bn. Sainsbury’s, by comparison, has lost 5% of its value, giving it a market cap of £4.2bn.

Against that backdrop, and with countless challenges around the corner, Asda’s £7bn valuation looks on the steep side.

Walmart may have to hold on to its British business a little longer unless it rolls back its Asda Price.