Asda rocked the market yesterday when it reported falling sales after two quarters of growth. But it is determined to stick to its plan.

Things went from bad to worse in the grocery sector yesterday when Asda joined the rest of the big four in reporting declining sales in the challenging market.

Third quarter like-for-likes fell 1.6%, ending Asda’s reign as the only big four grocer to have increased sales this year; like-for-likes were up 0.5% in the second quarter and 0.1% in the first.

However, Asda still remains the best performing big four supermarket after identifying the grocery headwinds early and changing its business accordingly.

As such, boss Andy Clarke says he is “proud of our performance in a tough market”, while admitting Asda has more to do in combatting the discounters.

“It’s been a tough quarter, the pace of change has accelerated,” says Clarke. “We’re on a five-year journey and we’re a year into it. There are clear winners and losers in our market. We’re a very clear winner. Our strategy is working.”

Here, Retail Week reviews Asda’s strategy one year in.

Store refits

Asda is lumbered with some large stores where sales are falling and that now look out of kilter with the new era of grocery retailing.

Clarke says there is “still a place” for large stores, and there are plans under way at Asda to make better use of the space.

The grocer is considering partnerships with other brands and retailers, as Sainsbury’s has with Jessops. But it is also looking at how it can make the most of its existing offer. “What you will see is a much greater participation of fresh,” says Clarke.

The grocer is testing new elements, including a larger fresh area front of store at its supermarkets in Coventry and Grantham, Clarke’s home town.

Asda’s chief customer officer Steve Smith says the idea is to test initiatives that can be rolled out across the estate easily.

“Watford is a stunning store you could never replicate in the chain,” he says, referring to Tesco’s prototype superstore it remodelled last year.

“If it works in Grantham it will work in every shop”

Steve Smith, Asda

It featured elements including a large Giraffe restaurant and a Harris + Hoole coffee shop.

In the test stores the changes are more evolution than revolution, Smith says.

Electronics and home appliances have been stripped back to make way for an expanded offer of fresh, a revamped cafe and a larger George proposition.

The larger cafe is now positioned at the front of the store and has been redesigned, inspired by Walmart-owned Sam’s Club in the US. Smith says there is a “clear, limited” selection of food in the cafe, at single price points, including £1 pizza.

Fresh is also now positioned at the front of store “loud and proud to show our quality,” says Smith. “We’ve changed the flow of the store.”

The George clothing section has also been given more space and there is new point of sale running throughout the store. “It’s value orientated and nicely designed,” he says.

The pharmacy and optical sections have been put together as part of a determined effort to appeal to the older shopper.

The food-to-go offer is bigger and Asda has installed a new service hub that includes a click-and-collect point.

The shops have a “much better look and feel” according to Smith. “If it works in Grantham it will work in every shop,” he says.

Both Grantham and Coventry cover between 40,000 to 50,000 sq ft. Smith says the next trials will be in larger stores and will include tie-ups with other brands to focus on “giving shoppers a reason to visit”.

Multichannel

Asda may be the only one of the big four not to have a c-store estate, but its convenience power comes from its click-and-collect offer.

Last year it unveiled plans for 1,000 pick up points across the country, and is well on its way to reach that target; by the end of 2014 it will have 600.

Clarke says Asda is “leading the market” in this respect.

Asda acquired click-and-collect intelligent pod technology in September, enabling customers’ online orders to be delivered to standalone temperature-controlled units.

The pods are expected to process more than 10 times more customer orders than existing click-and-collect sites.

Asda’s online sales jumped 19.6% in the third quarter and 10% of all web orders are collected in stores. Over the next five years, this figure is set to treble.

The grocer has also realigned responsibilities of its store staff as part of a dramatic restructuring to meet the changing needs of the customer, including installing more click-and-collect experts.

Every Day Low Price

Asda calls itself the only true EDLP grocer of the big four. The strategy seems to be working, and Clarke is defiant in the face of increased level of discounting in the market by rivals.

“We’ve seen gimmicks re-entering the market. It’s something we’re not taking part in,” Clarke says.

Clarke acknowledges that vouchering from Tesco, Sainsbury’s and Morrisons did impact sales in the third quarter but insists Asda will hold firm. “We won’t be knee jerked into reacting to short-term tactics.

“Vouchers can win quarters, but strategies win decades.”

Clarke insisted that Asda had maintained its “strong price advantage” over its big four rivals in the third quarter and that it is closing the gap with the discounters.

“In my 25 years in this industry I have never seen vouchers like that”

Barry Williams, Asda

Barry Williams, Asda’s chief merchandising officer, says Tesco and Sainsbury’s are both vouchering aggressively but highlighted Morrisons in particular.

“Our friends in Bradford have really hit the voucher button. In my 25 years in this industry I have never seen vouchers like that,” he says. “These are desperate measures.”

Williams says Asda has been impacted by the vouchering. “We’re not immune to it but it certainly isn’t going to blow us off our strategy,” he says.

Asda launched its Price Lock initiative two years ago as part of its EDLP strategy and Williams claims that the prices across 150 products that were held then are the same price today, despite movements in currency, commodity prices and yields.

It has invested £300m in prices this year, and Clarke described Sainsbury’s £150m investment, unveiled on Wednesday, as a “drop in the ocean”.

“Our price gap with Sainsbury’s already is in double digits. I’m surprised at the low level of price investment if that’s meant to be a competitive force against us,” Clarke says.

Clarke also slammed his big four rivals for not sticking to their promises of low prices.

Morrisons was found to have increased the prices of certain products last month. Clarke says his rivals are “not living by those commitments”. He adds: “We’re about trust and consistency and not playing games.”

Every Day Low Costs

As much as EDLP is at the core of Asda’s offer, every day low costs is at the centre of its business ethos. At present there is even an internal campaign running, encouraging Asda colleagues to “save £1 a day” to help keep costs down.

A big driver of its EDLC strategy is its International Procurement Limited (IPL), a wholly owned subsidiary of Asda.

IPL sources products ranging from produce to cooked meats and wine. Asda says its model focuses on “developing direct relationships with producers, by removing unnecessary process from the supply chain”.

Since Asda acquired it in 2009, IPL has grown eight fold and delivered £190m in savings, which Asda says it passes on to its shoppers.

Williams says taking control of the supply chain has also helped improve products, and that blind tests from researchers showed Asda produce has “consistently been rated highly by consumers”. 

Asda deserves plaudits for sticking rigidly to its plan in a market in which rivals are flapping and launching deep discounts. As long as it continues to grow share then the grocer can feel confident that this unwavering strategy is paying off.

But Asda is not bulletproof, and if its share starts to slip, it will have to, as its rivals have done, rethink its approach. And that would be a true test of its mettle.

Analyst’s view

Despite this drop in Like-for-likes, Asda is still winning the battle among the big four grocers, which all continue to feel the strain from the discounters at one end, and premium grocers at the other.

Asda’s focus on a longer game of price sharpening, backed by investments in operational efficiency, is helping it adapt to the fiercely competitive market where margins are coming increasingly under pressure.

This update provides further evidence of the highly competitive state of the UK grocery market; consumer finances remain weak, which has contributed to a mass exodus to discounters Aldi and Lidl and a resultant promotional war among the big four grocers leading to a squeeze in basket values.

The road ahead for the big four is set to remain bumpy and uncertain, and Asda should be cautious in its outlook.

However, solace can be taken from this performance; its long-term plan to redefine value retailing, of which price plays a central role, is largely working.

Some may have viewed this approach as too narrow before, but it is exactly the type of simple market positioning that consumers are seeking as they find it harder to resist the allure of both value-focused Aldi and Lidl, as well as the likes of M&S and Waitrose.

George Scott, senior consultant at Conlumino

Analysis: Why Asda's quarterly sales decline won't knock it off course