By James Davey
LONDON (Reuters) - Wal-Mart (WMT.N) is throwing its weight as the world's largest retailer behind its struggling British arm Asda after admitting it was too slow to respond effectively to the threat posed by the discount supermarkets.
Asda thrived for a decade as Britain's cheapest supermarket after it was bought by Wal-Mart in 1999 and remains the third-biggest in the country.
But German-owned Aldi [ALDIEI.UL] and Lidl [LIDUK.UL] have steadily cut into Asda's market share. The two discounters started opening stores in the UK in 1990 and 1994, respectively, but their big breakthrough came when the economic crisis hit in 2008 and more British shoppers were prepared to give them a go.
Declining sales show signs of tapering off since Wal-Mart veteran Sean Clarke became Asda's president and chief executive last July, with a focus on improving the look and feel of the stores as well as enhancing product lines.
Wal-Mart will provide further firepower by ensuring Asda leverages the parent's purchasing strength in everything from refrigerators to own-brand products and real estate to drive down prices and costs, said Scott Price, chief administrative officer of Walmart International.
"One thing that maybe we would criticize ourselves for is that we didn't start the repositioning of the business sooner, that we didn't focus more on the leverage opportunities so that Asda was able to invest more aggressively in price," Price told Reuters in an interview.
"What Sean is able to do with his global experience at Wal-Mart is to know what levers to pull," he said, in a reference to Clarke's time with Wal-Mart in Japan, Canada and most recently as chief executive in China.
Working more closely with its parent, Asda will be able to market more Wal-Mart brands as its own at a lower price than rivals, Price said.
"He's able to pull private (Wal-Mart) brands and put an Asda brand on it that is equal to the national brand in the UK in terms of quality and sensory, but at a price that no one else can match," he said of Clarke.
In return, Wal-Mart was looking for more ways to exploit the areas where Asda has excelled, for example with a popular olive oil originally sourced by Asda and now sold across the group, including in the United States and 10 other international markets.
From its headquarters in Leeds in northern England, Asda claimed to be the first of Britain's major grocers -- which also includes market leader Tesco (TSCO.L), No. 2 Sainsbury's (SBRY.L) and No. 4 Morrisons (MRW.L) -- to spot the threat from the discounters.
With fewer stores in the more affluent southeast of England than its rivals and the vast majority of its business in the large stores that have become less fashionable in recent years, Asda was most exposed.
After it lost its price advantage and failed to offer other reasons to shop there, performance slumped.
Wal-Mart added to Asda's problems by diverting key executives from Britain to the United States and focusing too much on cutting costs and maximizing short-term profit at the expense of investing to protect market share, analysts said.
The result has been nine straight quarters of underlying sales decline since the middle of 2014, which translated into a more than 1 percentage point loss in market share, according to researcher Kantar Worldpanel. Its share currently stands at 15.6 percent, versus more than 28 percent for Tesco.
David Cheesewright, CEO of Walmart International, in June expressed disappointment at Asda's weak performance and said it would shift from protecting profit to protecting market share.
The data shows signs of improving. In November Asda reported a like-for-like sales decline of 5.8 percent for the third quarter to Sept. 30, compared to the second quarter when it reported a fall of 7.5 percent, its worst drop in quarterly sales.
A further material improvement is expected when it reports fourth quarter sales on Feb. 21, with analysts forecasting a decline of 2-3 percent. Monthly industry data has also shown a better performance over Christmas and January.
While sales fell 1.9 percent year-on-year by value in the 12 weeks to Jan. 29, according to Kantar, Asda increased the number of shoppers visiting its stores.
The improvements reflect the early work of Clarke and former Sainsbury’s executive Roger Burnley, who joined as chief operating officer in October, analysts said.
That includes making Asda stores cleaner and less cluttered, with more staff on the shop floor and better availability of fresh produce and meat -- key ranges that either drive customers into stores or, if you get them wrong, out.
Clive Black, analyst at Shore Capital, said there are also signs that Asda is stepping up product innovation with, for example, new items in the frozen and chilled areas and in its “Extra Special” premium brand.
At the same time Asda has developed complementary services and partners within its stores, such as with sports retailer Decathlon and butcher McGee's, while more freedom is being given to individual managers when it comes to the layout of their stores.
NO RECOVERY TIMELINE
It looks likely to be a long road to recovery, however.
"Things are going a bit better but they're going a bit better from a catastrophic level of performance," one senior UK retail industry executive told Reuters, asking not to be named.
"Everybody thinks you can turn around a business in a year or two and you can't. This is a five-year project," he said.
He questioned whether Wal-Mart would provide the necessary investment. "Their instinct is to save their way to victory."
Price said Wal-Mart was committed to Asda and has tasked Clarke with building a sustainable business model.
While Asda has said it will cut prices equating to 1.5 billion pounds of savings to the customer over five years from November 2013, washing through at about 300 million pounds a year, Price declined to say what additional investment was required in the stores.
"We are making very solid progress, (but) there's no timeline (for recovery)," he said.
($1 = 0.7993 pounds)
(Editing by Kate Holton and Sonya Hepinstall)