How to solve a problem like Asda - part 2

Some great feedback for part 1; I thank you very much for all the people who have read and signed up to the "basket case" newsletter.

After the first "scene set" for the case for Asda's current issues and comparatives with former strugglers in the sector. Today we will take a look at where the issues are from a trading / marketing sense and more importantly, what to do.

We'll cover stores and wider standards off in part 3 and then consider Christmas.

All of these points within are observations, not criticism. There are numerous reasons that a retailer finds itself in a state, with falling sales, bigger declines in volumes and an offer that is increasingly without clarity, or cut through.

All too often; retailers that struggle are ones that end up with about 15 messages, talking to customers, rather than the usual 1-2 clear, consistent messages that follow the customer around the store.

The reassuring drumbeat on value and quality; customers are able to get a "feel" for value, just by walking the store. Nothing jumps out that's not "value" and the customer is then reassured that the retailers is talking their language.

This includes product that is featured on the promotional space; Andy Clarke used to talk about "expensive promotions" - IE those that are 2 for ￡x but actually end up costing the customer more. Accessing the deal costs more than the customer wants to spend.

So they end up going to Aldi, or Lidl, or even Tesco who operate a semi EDLP offering, versus Asda who, pumped up on the commercial money drug. Increasingly find themselves looking irrelevant on deal, because the suppliers are driving the negotiation.

I talked about EDLC v EDLP on my blog back in 2011(!) https://www.groceryinsight.com/2011/10/asda-supermarkets-super-centres-and-pure-edlp/

It's hard to believe any retailers trade plan (if writing one from scratch) would feature the amount of branded ends and in aisle signage that Asda have. It's clear commercial monies are starting to really dictate things, which is challenging as it weakens any ambition in the organisation. No innovation, no trying different promotions and new ideas are slowly eliminated.

In favour of the spreadsheet managers.

Almost a total failure if you do not manage to link any deal, or end, to a supplier and get some of that sweet commercial income to prop up the faltering sales line. Volumes are in reverse which then compounds things, every retailer, needs to move volume, it keeps the world spinning. Prices are lower when the retailer buys more, everyone grows together. Look at the success of Aldi, and Lid, as a case in point of what volume can do for a retailer.

But when you're in the situation that Asda are in, falling volumes weaken your negotiation platform; suppliers are hardly going to give exclusive products, or promotions to a retailer that's tanking on the Kantar, like for like sales and volumes are in reverse.

So you're asking for the same price, or a lower price, from a supplier when you're buying less from them, due to the state of your own business.

Price activity is also then under threat. The supplier knows how much they're giving the retailer for back margin (IE any income that isn't from the buying of the product at x and selling for y). They could just say, ok, you can have a lower price on Heinz Beans.

But we'll take it from the commercial money / back margin, so there's no guaranteed income for the ends we were going to run (with signage, of course).

But there is a lower price.

Which is not guaranteed to do anything. There's a risk there.

Guaranteed income from the signage and confusing ends, alongside various messages all over the store versus a lower price.

BUT no guarantee of taking the money you would have taken from selling the space.

So, I get it.

Between the devil and the deep blue sea.....

However, the more deals that are done without the customer (lower prices) in mind. The closer you get to becoming a real estate company that "happens to sell food."

Selling space to highest bidder essentially.

But the bigger the profit gap grows, due to (ironically) falling sales (plus a bigger hit on volume) the weaker the retailer becomes.

The more commercial deals they need to do. Even though everyone knows it's moving them further away from what they need to be doing, which is growing volume, to get a lower price from the supplier and to lower prices at the shelf edge.

Something Asda were always so brilliant at.

But now, they're in a desperate state. So what do you do?

You have to get off the drug. It's helping no one, compounding the problem and customers are not going to suddenly start turning up in their thousands because the branded signage is still up.

Equally, they're not going to come back in their thousands if it all was taken down tomorrow, either.

I talk about "commercial signage, or money" as if it's all evil. It isn't. It's a broad brush for sure. Some commercially funded deals are good, they make sense, they intend to grow volumes.

But it's abused, it becomes a cash cow. Like a poor diet, or smoking 20 a day, the ill health isn't felt for some time, perhaps 2-3 quarters you can get away with it.

But it's the "Japanese Knotweed" of the food retail sector. It just starts to expand, quickly, it takes root, more appears, you can't get rid of it. The profit line is reliant on it.

But it's actually hurting the business because the customers aren't responding. The listening groups won't be full of people saying "there's all this branded signage" but they will be talking about poor value for money and general store standards weakening.

So the first point - to turn the ship around. Commercial money has to be all but eliminated in current form, rebased with fewer metrics (Tesco went from 36 to 3 under Dave Lewis) and for me, x% of said deals should have to be volume driven rebates.

This will free everyone up to focus on range, assortment, price and promotion (if any).

At the minute there are people selling space to the highest bidder and that is looking like a train rapidly running out of steam........

Any monies for commercial signage for brands, should see the buyer have to feature the own label equivalent on either signage or deal to highlight customer choice.

That would focus the buying team on volume driving. This brings its own issues around labour in store and will be able to keep it on sale, but we'll get there.

The major challenge with this is that Asda are owned by private equity; we all know the challenges around the debt pile and the interest. Despite efforts to reduce the debt (and by definition, the interest bill), transactions to EG and the rest. It's still significant and will drive far too many decisions unfortunately.

They have to get off the drug.

This means that changing course is even harder than it would be in a PLC; because the chain needs to invest, but the leverage is such that it's difficult, harder than it would be due to the fact that the chain has to service (pay interest) on the debt that was used to buy itself from Walmart.

These "notes" are short term and are renewed every few years or so. That means that you're hopeful the interest rates are falling by the time they're renewed. Equally Asda was recently uprated for their performance in 2020, meaning they're a lower risk business to lend to.

Food retailers generally are due to their cash generation; however profits are wafer thin in food retail so it's one to watch. A better risk rating will mean lower interest rates when the loan notes are renewed, however 2030 appears to be the date for some of them.

All of this factors in to the decisions that are made. Commercial money, given the above is not a huge leap of faith to make. But it's front and centre of the issues that the chain faces.

They have sold and leased some buildings back to pay down the debt, but of course, you're then paying a mortgage on property you formerly owned.

So - another long read on the commercial side of things, I haven't delved in to half of the detail I intended to, as I am aware of people's time and that means more material for future issues.

Let's do store standards next; somewhat "easier" to spot now I've spent since 2009 (Twitter) educating everyone on what a good shop looks like(!)

You can barely move for people pointing out what a poor job Asda are doing, and it's entirely correct. Standards, like everything else have fallen by the wayside.

Cleanliness is a continued topic and it's a concern really, given the Asda "aces" and the general theme of hours cuts and it seems obvious to everyone that there aren't enough hours around the stores.

You can't hope to develop a volume based sales led recovery, until you stock, staff and clean the shops. The plan falls down, because the stock won't be on shelf.

Store standards next; we'll review what needs to happen. It's not a case of throwing rocks at the store, they're doing their best.

It's all about the wider team, central, trade planning, buying, commercial, marketing. They are the ones who dictate a lot of this stuff.

The stores have it done to them; and that makes things difficult when maintaining morale, pushing for standards and sales. But it's all fixable.

What is amazing when reading this back before sharing, is the complete lack of a value message. The imagery, there's no drumbeat anywhere.

Just a mass of campaigns and signage that don't really link together at all.........

Goes some way to explaining why Asda are in the mess they are in.....