The price of private equity may be too high for Asda

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The Asda superstore in Leyton Mills, east London is not an enticing prospect on a rainy Tuesday morning. So it helped that when I visited this week without change for a shopping trolley, I was lent a shiny pound coin by Ghulam Kayani, a security guard at the door. As I thanked him, he put his hand on his heart and smiled.

It was a pleasant surprise and Asda needs more of those at the moment. The UK’s third-largest supermarket will turn 60 next May, but it does not have much to celebrate. Pursued by German discount chains Aldi and Lidl, highly leveraged after a private equity backed £6.8bn takeover in 2020, its sales falling and lacking a chief executive, it has seen happier times.

Lord Stuart Rose, the retail veteran who chairs Asda, does not mince his words. He confessed in an interview in August that he was “embarrassed” by its performance, and last month he took over temporary executive leadership with Rob Hattrell, a partner at TDR Capital. Unless Asda can regain momentum, all those involved in the takeover will look rather foolish.

They include Mohsin and Zuber Issa, the brothers who built the EG Group chain of petrol stations and convenience stores before acquiring Asda with TDR. Mohsin Issa has stepped down from leading Asda and is returning to Blackburn to run EG Group. He retains a 22.5 per cent stake, while Zuber’s holding was bought by TDR in June. Rose must now find a retail chief executive who can restore Asda to health.

That will not be easy. Mohsin Issa referred to Asda as the cheapest traditional supermarket and it always took pride in undercutting rivals such as Tesco and J Sainsbury. From its “Asda Price” ads in the 1970s to its superstores, it was known for value. A walk round Leyton Mills confirmed that: it was full of “Price Drop” signs, £5 chilled chickens and large bags of rice.

But “cheapest traditional supermarket” is no longer a thing in a market where Aldi and Lidl compete. Aldi operates a store near the Leyton Asda in a convenient high street location, which was filled with shoppers on Tuesday. The chain is expanding across the UK and has already displaced Wm Morrison as the fourth-largest supermarket. It is now squeezing Asda’s middle-market value brand.

Asda has little room for manoeuvre. Despite its poor sales, Leyton Mills did not feel badly managed: the staff were helpful and the shelves well stocked. It was a reminder of the breadth and efficiency of the UK supermarket sector, with Tesco as the leader. The margins are low, the market is saturated and quite good is not good enough.

This could be Asda’s low point. It has been in upheaval since the 2020 deal and the acquisition of 350 petrol stations and 1,000 food-to-go locations from EG Group last year. It has also been disrupted by a huge effort to migrate its technology from its former owner Walmart, including 16,500 checkouts. If the permanent revolution eased off, it might do better.

It remains fair to ask whether private equity ownership of supermarket chains is a good idea. Clayton, Dubilier & Rice acquired Morrisons for nearly £10bn in a deal later called a “fiasco” for the banks involved. Morrisons made a £1bn loss last year because of its high debt costs and Rami Baitiéh, former chief executive of Carrefour France, is now trying to revive it.

Supermarkets are fine targets in theory, with famous brands and strong cash flows. But competition is too intense to deploy the old private equity strategy of cutting costs and raising margins: shoppers can too easily go down the road (or online) for better bargains. The only way to succeed is by investing enough to increase sales and seize market share.

“We went in with our eyes wide open on the quantum of capital that it was going to cost,” TDR’s joint managing partner Gary Lindsay assured MPs in January. It claims to have a longer-term view of investments than rivals and to be patient in restoring underperforming assets. The fact remains that, while Asda seemed to respond well at first, it has faltered.

Perhaps Mohsin Issa got distracted by technology and did not care enough for Asda’s customers. Maybe the curious division of responsibility at the top, with no permanent chief executive for the past three years, took its toll. That would all be fixable. The scarier possibility for TDR is that the UK supermarket business has changed, and not to Asda’s advantage.

At least Asda’s heart is still beating, to judge by my visit to Leyton Mills. As I returned Kayani’s coin, he handed it to the next shopper who needed one for a trolley. Every customer counts.

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