While UK supermarket group Asda has seen a rise in pre-tax profits of 5.2 per cent in its full-year results, the real concern for the retailer is its inability to compete with the discounters.
Sales by the Walmart-owned company fell 4.7 per cent to £22.1 billion over its most recent financial year.
Although Asda blames much of its poor performance on deflation, this has impacted the entire grocery sector, and makes it an increasingly weak explanation for Asda’s recent performance.
The key reason behind Asda’s downfall is its inability to rise above the threat of the discounters, (such as Aldi, Lidl and Poundland). Historically, Asda has always traded upon low prices to attract customers, but the discounters have repeatedly undermined this unique selling point and therefore left the retailer more exposed than its Big Four rivals, Tesco, Sainsbury and Morrisons.
Whilst discounters continue their rapid store expansion across the UK, Asda needs to acknowledge that they have become established competitors in the grocery sector and can no longer be regarded as a temporary threat from the recent recession.
Asda’s investment in its ‘Project Renewal’ scheme will be watched carefully to see if the retailer can boost footfall and improve sales performance. Asda’s strategy includes improving its George.com click and collect offering, modernising stores as well as opening smaller store formats.
On a positive note, its proactivity in terms of reducing costs across the business has boosted its profitability. However most crucial is Asda’s plan to regain credibility in its price proposition, especially important in the wake of recent price cuts on fresh produce by rival Morrisons. With Brexit leaving prospects for UK consumer spending uncertain, Asda will need to act soon if it is to claw back customers from competitors.
- Fiona Paton is an analyst with Verdict Retail.