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Walmart’s U.K. Retreat Leaves Asda With New Owners, Old Problems

Deirdre Hipwell
·5 mins read

(Bloomberg) --

Walmart Inc.’s 1999 acquisition of Asda looked set to disrupt the U.K. supermarket business, with the U.S. retailer using its deep pockets to shake up entrenched players like Tesco Plc and J Sainsbury Plc.

The purchase never quite lived up to the hype. Asda struggled to defend its market share against bigger rivals and the German discounters Aldi and Lidl. On Friday, the world’s largest retailer began a retreat, selling a majority stake in Asda to buyout firm TDR Capital and the Issa brothers, who made their wealth in gas stations.

Walmart hailed the deal as creating the “right ownership structure for Asda, whilst bringing a new entrepreneurial flair” to U.K. retailing. Yet the buyers will face the same challenge that frustrated Walmart: Finding a winning strategy in arguably the world’s most competitive grocery market at a time when the way people shop is changing and the pandemic and Brexit are making food security more vital than ever.

Walmart Pulls Plug on U.K. With TDR’s $8.8 Billion Asda Deal

“The deal raises more questions than answers,” said Clive Black, a retail analyst at Shore Capital. “Whether or not the raw entrepreneurship and ambition of the Issas is enough to drive greater same-store sales and cash flows per square foot on a sustained basis remains to be seen.”

TDR and the Issa brothers -- Mohsin and Zuber -- plan to invest more than 1 billion pounds ($1.29 billion) over the next three years to expand Asda’s U.K. suppliers and drive more online sales, while using their expertise in convenience retailing to expand the grocer’s customer base.

Asda’s management team, led by Chief Executive Officer Roger Burnley, will stay, while Walmart will keep a minority stake and one board seat and continue to supply the stores. The transaction, which values Asda at 6.8 billion pounds, is Walmart’s second attempt at a sale after a merger of the chain with rival Sainsbury was blocked by antitrust regulators last year.

The self-made Issas are touted by Walmart as the secret sauce of the deal, who will recharge a business that has seen its market share fall to 14.5% from 17% in the past five years, based on data from Kantar, a research and consulting group.

Gas Station Empire

The two brothers grew up in Blackburn, an old mill town outside Manchester. They started their Euro Garages business in 2001 with a single gas station, before building it up through a series of debt-fueled acquisitions into an empire with more than 6,000 sites on three continents. In 2016, they merged Euro Garages with TDR Capital’s European Forecourt Retail Group to create EG Group.

EG Group has grown by opening food outlets and convenience stores that sell higher-margin goods at gas stations and highway service areas in partnership with brands like Starbucks, KFC, Subway and Spar. Last month, it began a trial to test a new “Asda on the Move” convenience store format at three of its U.K. stations.

While EG Group isn’t involved in the purchase of Asda, Walmart reckons that the Issa duo can open a route for Asda into the lucrative convenience-store market. This could potentially involve a nationwide rollout of Asda on the Move stores at EG-owned sites, as well as the introduction of branded concessions into Asda’s large stores.

The grocery chain is already testing a concession partnership with Greggs Plc to open mini outlets in Asda shops selling its range of sausage rolls, sandwiches and salads.

Crowded Field

Yet Britain’s convenience-store arena is crowded with competitors, and many of the best sites have already been snapped up. What’s more, the rapid growth may be poised to cool. IGD, a U.K. food industry training and research group, predicted in August that growth in the convenience market will moderate over the next two years, particularly given the slow recovery of city centers since the pandemic.

TDR and the Issa brothers weren’t available for comment.

Asda has 641 shops across the U.K., mostly larger stores which in recent years have been challenged as people turn to online shopping and make more frequent trips to convenience markets. While bigger outlets have done better during the pandemic, that may prove short-lived.

“After a boost to sales in 2020 from Covid-19, supermarket growth will turn negative by 2022,” said Simon Wainwright, director of global insight at IGD. “The channel will lose ground, particularly to discount and online.”

Online Ambitions

Asda’s customer base is more price-focused than some rivals, leaving the grocer more exposed to the threat from Aldi and Lidl. And online shopping is typically less profitable than selling to customers in stores. Still, Asda has been pushing to expand its internet sales, and in August revealed it had increased online capacity by 65% since March to 700,000 weekly order slots, with plans to boost that to 1 million slots next year.

It’s not clear how Asda’s new owners plan to further drive online growth. The buyers, who are funding the purchase with debt and equity, could potentially put Asda’s large property portfolio to work by raising capital through sale-and-leaseback arrangements.

Burnley, as well as the two Asda CEOs before him, took costs out of the business, leaving little low-hanging fruit for the new owners, who have pledged to maintain “competitive pay” for Asda staff and low food and fuel prices.

Judith McKenna, CEO of Walmart International, told Bloomberg it’s too early to say which avenues Asda would take, but said growth in the stores and online business are the main priorities.

“We are not going to talk about the specifics or tell anyone what we are going to do, but I think we will help bring a different feel to U.K. supermarkets,” she said.

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