Asda's awful quarter sparks price cut rethink

Asda confirmed some good news for its UK supermarket peers alongside its eighth consecutive quarter of declining sales.

Parent company Wal-Mart on Thursday rowed the company back on mooted plans for fiercer cuts, saying the UK-focused Asda would stick to a previously stated five-year £1.5bn price investment plan, which tallied with fresh research that found the UK arm has actually raised average prices in recent weeks.

Asda's sales for the three months to 30 June fell 7.5%, its worst ever performance and a further slowing after a 5.7% fall in the previous quarter.

“In the UK, fierce competition and food deflation continue to challenge the market, significantly impacting traffic,” chief financial officer Brett Biggs said.

Analysts at Shore Capital said that with traffic down circa 6% this implied "considerable volume contraction" in the second quarter.

Last month, analysts at HSBC warned that Asda was poised to begin slashing prices even harder, based on comments from Wal-Mart management to shareholders that its UK supermarket chain will prioritise sales over margin.

But, despite the consecutive losses sparked by the burgeoning presence of discounters Lidl and Aldi grabbing Asda's previous value stronghold, Biggs said that the company remained “committed to the previously announced five-year £1.5bn price investment”.

“Our strategy remains focused on improving retail basics, simplifying and strengthening the offer through improved availability and assortment discipline, reducing costs through our cost analytics programme and driving sales through strategic price investments,” he added.

UBS analysis has already uncovered evidence of Asda taking its foot off the gas, finding it has actually on average raised like-for-like prices 3.2% in July.

Collecting around 20,000 prices from the main supermarket groups every week for the last three months, the UBS 'Evidence Lab' found the sector as a whole had lifted like-for-like prices up 0.4% year-on-year in July after a 0.9% fall in June.

Walmart CEO Doug McMillon said the 'Project Renewal' strategy to turn Asda around was focused on "improving the retail basics", simplifying and strengthening the offering both online and offline through improved availability, reducing operating cost and cost of goods, as well as the investment in price to drive sales.

"While our turnaround will take time, I’m confident in the new leadership team there and want to assure you we’re addressing this with urgency.”

Shore Capital analyst Clive Black said the considerable market speculation that Asda was about to unleash "a form of retail Armageddon", which had "unnecessarily weighed upon sector sentiment".

With Wal-Mart dispelling such a possible expectation, assuming it was not secretly working on a more cunning plan, Black said: "We believe that this is good news for sector sentiment, particularly for the UK listed supermarket groups".