Asda’s new UK boss could be planning a nuclear price war. He could easily lose it

You’ve probably never heard of him, but incoming Asda boss Sean Clarke is said to be the man with his hand wavering over the red button, ready to trigger a supermarket price war to end all price wars.
Last week respected HSBC retail analyst David McCarthy put the cat among the pigeons warning that Clarke, installed by his American paymasters Walmart, was gearing up for a summer price war that could “wipe out” rivals’ profits. On publication the note, titled Defcon 1, managed to wipe £1.6bn from the stock market value of listed rivals Tesco, Sainsbury’s and Morrisons in a single day’s trading.
Clarke, who started his retail career at Asda in 1996, is an unknown quantity albeit with a global supermarket pedigree. He has worked for Walmart for 20 years, serving tours in Japan, Germany, Canada and latterly Walmart China and is being parachuted in to end a long period of underperformance at the retailer’s UK business. His surprise appointment deposed another Clarke (Andy), who had been in charge since 2010 – a gruelling period characterised by the rise of discounters Aldi and Lidl, unprecedented price deflation and changing shopping habits.
While its publicly listed rivals have spent the last two years cutting prices (and profit margins) to win back shoppers, Asda has focused on defending its profitability rather than market share with an efficiency drive that has seen it fall behind rivals in both the quality and availability of its food. Customers have punished Asda for taking this stance, with the retailer nursing a fall in underlying sales that is approaching its second anniversary. It is now the UK’s third-largest grocer after surrendering second place to Sainsbury’s, a swap once considered inconceivable.
The changing of the Clarkes, which officially takes place tomorrow, came soon after Walmart International chief David Cheesewright told the Walmart annual investor jamboree in Bentonville, Arkansas that it was “very disappointed” with Asda and it was time to change tack and switch from “protecting profit to protecting share”.
Does that mean a price war? In McCarthy’s note he suggests: “If Asda decided to invest half its margin into price, a competitor reaction could wipe out almost all industry profitability and would force an industry restructure.”
But why would he do that? It would hurt Asda too. Other experts point out that Asda offers the lowest prices of the “big four” supermarket chains anyway. Bryan Roberts, analyst at TCC Global points out: “Asda’s been the cheapest for 15 years and it’s obviously not working. Why would being even cheaper work more effectively? It’s not about getting cheaper, it’s about getting people to re-evaluate and revisit Asda.”
To win shoppers in China, Clarke (Sean) has had to do more than play the price card as their choice of supermarket is also influenced by concerns such as food quality and freshness. “He has experience of using messages other than price to drive sales,” says Roberts.
Talk of a more intense groceryprice war comes as food retailers gird themselves for the fallout from the Brexit vote. The collapse in the value of the pound is bad news for a country that imports 40% of its food and retailers will have to walk the tightrope of taking a hit on profits by absorbing price rises themselves, or passing cost increases on to price-sensitive shoppers.
As if that were not enough for supermarket bosses to wring their hands over, another City broker waded in last week in to argue that Tesco’s shares, currently at 163p, are only really worth 80p because there are too many UK grocery stores as Aldi and Lidl expand and the online crew, Ocado and Amazon Fresh, take share. Up to a third of supermarkets need to close to make the industry more profitable, is the message from analysts at Redburn.
It’s not just price that makes us shop where we shop and Asda needs to broaden its appeal beyond “busy mums on a budget”. Two-thirds of shoppers now frequent the discounters, yet many Britons still turn their noses up at Asda. It has an image problem, not a price problem, it needs to address. For Clarke (Sean) to choose the nuclear price option looks like the road to mutually assured destruction.
It’s grim down south
The unfortunate commuters of south London and Sussex can from tomorrow plan their lives on a surer basis, according to Southern. The solution, though, involves “pre-cancelling” 341 trains a day and consigning coastal residents to the bus.
These are desperate times on Southern, a once unremarkable train service whose extraordinary decline has sent its passengers – many priced out of London into the suburbs and beyond – into despair. The management, its reputation shredded, has sought to lay the blame on the unions, which brought industrial action over the role of conductors on new trains.
But accusing staff of playing sick does not, unsurprisingly, appear to have won over employees. And the chaos had already been plain to see for commuters, who know that the strikes and staff shortages have only exacerbated deep-rooted problems: problems that include the revelation to MPs last week that Southern owner Govia Thameslink Railway (GTR) only found out how few staff it had when it took over the franchise.
Yet GTR has one supporter: the Department for Transport (DfT). The continuing defence by ministers, and refusal to countenance appeals to strip the company of its franchise, no matter how many performance measures it breaches, has fuelled union suspicion that GTR are simply doing the DfT’s dirty work. Union opposition to driver-only operation of doors, a practice GTR is extending, is a stated safety concern, but underlined by the fear that job cuts will inevitably eventually follow.
The government doubtless would like to cut staff costs, but the actual problem may run deeper than just money. The rail franchising system is creaking badly. Bidders have been far from plentiful in recent competitions. The totemic, lucrative East Coast franchise has not delivered the anticipated rewards back in private hands.
Now, the newly combined Thameslink, Great Northern and Southern mega-franchise that Govia operates is starting to look just too big to manage. For rivals, taking it over might now look about as appealing as a daily commute to the capital from Brighton.
Putting up the warning signs
The commercial property market is an early-warning radar for the economy. If businesses start pulling out of rental deals to occupy office or shop space, that it is not a good sign for job creation. If property firms pull out of deals to buy buildings or scrap plans for new developments, those are not good signs either.
Last week saw a wave of property funds announce that they will stop investors withdrawing their money, which is another warning sign. The funds stopped redemptions because so many investors were looking to get their cash after the European Union referendum.
This risks creating a vicious circle. As investors pull their money out of investment funds, those funds are forced to sell assets to hand back the cash, suppressing prices in the market and causing further uncertainty.
The sharp fall in the value of sterling means that commercial property in the UK, particularly in London, is now cheaper for overseas investors. That could be the only thing that protects the sector – and maybe the economy – from a Brexit slump.

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