Asda’s insatiable appetite for profits at all costs
The old adage that “sales are vanity, profits are sanity” might need to be retired, if today’s Asda results are anything to go by.
The Walmart-owned supermarket just posted its 10th consecutive quarterly fall in sales, and while the UK’s third biggest grocer is starting to turn things around, there is a worthwhile lesson to be had about putting profits above all else.
Around four years ago, Asda could do no wrong — while its Big Four rivals (Tesco, Sainsburys and Morrisons) struggled to come to terms with the idea that shoppers wanted cheaper food and were flocking to Aldi and Lidl in record numbers, Asda cut prices and stemmed the tide of its own customer exodus.
But, a year later, Asda’s parent company Walmart was starting to struggle in its core US market. Looking around the globe, bosses in the States saw Asda was one of its best performing businesses and set about meddling in the company by telling then Asda boss Andy Clarke to do whatever it takes to keep profits roughly at £1bn a year.
The policy sounded like a good idea — Tesco was in the midst of an accounting scandal and the biggest write-off in retail history; Sainsbury’s was moving sideways and failing to grow profits and Morrisons was messing around with misty veg, as Ken Morrison was calling the board’s strategy “bullshit”.
But, slowly, its rivals started pulling themselves together. Tesco got in Dave Lewis — who, despite an evident God complex, was a million times better than his predecessor. Morrisons hired a new chairman and new chief executive, who seemed to understand how to sell food, and Sainsbury’s started to tighten up its operation, replacing Justin King with its less flamboyant but more realistic new boss Mike Coupe. All reduced prices.
This left Asda in a mess — compete with its rivals properly and reduce prices, or keep its paymasters in the US happy, regardless of the customers they would lose.
Asda chose the latter — cutting staff costs to the bone; becoming one of the last supermarkets to declare it would pay staff under 25 the same as those over 25 when the new “Living Wage” was introduced and pulling out of plans for convenience stores.
This penny pinching attitude was best illustrated by an edict from head office to scrap free tea and coffee for staff in stores — a sure sign of a business scrabbling around for ever-more desperate strategies.
Customers started to notice these changes, as store staff were laid off and those who remained became even more demoralised.
Prices stayed artificially high, with margins of almost 5%, when the rest of the sector was trading at around 3% (or at a loss as Tesco was doing for a time).
And, as if by magic, sales started to plummet.
Clarke was forced to hold upbeat press conferences every quarter, dragging his executives to London for a thorough beasting at the hands of the press, and could only keep reminding everyone that profits would be maintained, even sales were falling off a cliff and staff were losing their jobs.
By the end of his tenure, the press conferences were scrapped. Whether he left because he was fed up pumping out a line dreamt up by his US overlords, which anyone in British retail will tell you doesn’t work, or he had simply failed to be a sensible chief executive is unknown. But, the coverage his sendoff received would suggest the former and I wouldn’t be surprised to see Clarke pop up in another (probably less high profile) retail role.
New chief executive Sean Clarke (no relation) seems to have been more gutsy in telling the US to get stuffed, and is pushing sales along in a better direction (they are still falling, but not as badly).
But the damage has been done, and those customers that deserted Asda in the past are unlikely to be fully won round now that they have been given the opportunity to check out the competition.
Lots of retailers put sales above profits — John Lewis revel in their weekly sales stats, while usually hiding their less-than-impressive profits in a half-yearly report which all manages to fall on the same day several other major listed retailer.
Justin King at Sainsbury’s was famous for talking up endless quarters of rising sales, but profits barely moved.
And all supermarkets have been guilty of flogging booze at (almost) below cost to get customers through the doors and boost their sales up in the short term.
None of this impresses shareholders, and most can see through it — even if the press slobber all over the monthly sales stats from Kantar Worldpanel or Nielsen like a rabid fox in a chicken coup.
So, in some ways Asda was right to put profits first. But when Asda put profits above everything else, convincing themselves quarter after quarter that the hundreds of thousands of pounds flowing out their door to rivals doesn’t matter, the bosses need to wake up and smell the coffee.
A happy balance should always be found. Unfortunately, Asda had about as much balance as a pissed-up tightrope walker and whether there’s a safety net to catch them, remains to be seen.