Asda is finding trading tough but has big ambitions. As Andy Bond prepares to take a back seat, Jennifer Creevy looks at the big issues his successor will need to tackle to get the grocer back on track

Asda’s departing chief executive Andy Bond admitted last week that the grocer is “not trading as well as we’d like”.

The retailer was hit more than its rivals by the snow over Christmas, its lowest price position had been clouded by promotional price wars, and Bond said Asda had “a blip” in its pipeline of new stores.

While it should not be forgotten that Bond’s tenure included 15 quarters of consecutive market-beating sales growth between 2006 and 2009, his move upstairs to part-time chairman means the new chief executive will need to hit the ground running to restore Asda’s level of growth.

At the grocer’s strategy update last week, Bond was frank. “I won’t beat around the bush. We are not happy with our sales performance,” he said. But it does not seem likely this dip in performance had anything to do with Bond’s unexpected departure.

Rather, it appears Bond did not want to relocate his family to Walmart’s home town of Bentonville to take a bigger job. Walmart chief financial officer Tom Schoewe insisted Bond’s decision was entirely his own and not linked to recent performance.

Bond suggested that if his new part-time role works out he will be “around a long time”. His role will include advising Walmart on new markets such as Russia while he has a chance to “look outside to see what else there is around”.

In the meantime he laid out his five-year vision for Asda, which he insisted is “a team plan - not an Andy Bond plan”. That vision, Asda’s directors believe, will restore its sales performance, help stem flagging market share and cement its position among the leaders in food and non-food.

In order to achieve Asda’s ambitious goals, the incoming chief executive will face several challenges. Whoever steps into Bond’s shoes, here are the five key questions that they will face.

How can Asda become number one in non-food?

Asda aims to be UK market leader in non-food in the next five years, although Bond was quick to point out that the goal is an “aspiration”.

The grocer revealed its total 2009 sales were £19.9bn and, of that, non-food sales, excluding petrol, make up about £3.2bn. By contrast, last year Tesco’s UK non-food sales were £9bn.

Asda outlined its organic general merchandise growth plans, but few believe there is any chance of Asda stealing the top non-food spot without an acquisition.

Asda wants to open 150 Asda Living stores, which sell everything from fashion to electricals, over the next five years. At the moment there are 24 such shops, which started opening in 2004. Non-food sales will also be driven hard through superstores and online.

Bond said space for Asda Living stores is relatively easy to come by because of their edge-of-town or retail park locations. He said the grocer is happy with the format, having moved George to the ground floor in existing stores and the rest of the ranges to the first floor.

George is the jewel in Asda’s non-food crown, accounting for more than 50% of sales through Asda Living stores. It has a strong lead over Tesco’s clothing and vies closely for the lead spot in volume with Marks & Spencer and Primark.

However, without an acquisition Asda is likely to struggle to overtake Tesco in non-food. Oriel analyst Jonathan Pritchard says Asda “cannot realistically hope to be the UK’s number one retailer without an acquisition”, while Shore Capital analyst Clive Black says: “If Asda really wants to move the dial in non-food, it needs to do an acquisition.”

Speculation about an Asda bid for Argos and Homebase owner Home Retail has resurfaced in the past few weeks. Numis analyst Nick Coulter says a pounce on the general merchandise giant would “create a leading UK non-food retailer”. He says sales of £4.4bn from Argos, and £1.6bn from Homebase would “materially increase penetration”.

Black suggests there are other options for Asda too. “Companies such as Matalan, Halfords or JJB could all feature high on Asda’s radar, either as property grabs or as complementary add-on retailers,” he says.

How can Asda’s format development arrest its food market share decline?

Asda suffered over Christmas and the new year from a combination of factors that hit sales.

Credit Suisse analyst Andrew Kasoulis says some factors such as the bad weather were outside its control, but others, such as its promotional stance, were “self inflicted”.

Either way, Asda’s latest market share figures from Kantar Worldpanel show it fell 0.2% to 17.1% in the 12 weeks to March 21.

Bond attributed most of the decline to a “blip” in its pipeline of new stores, so the grocer has set a target of building a chain of smaller shops of between 8,000 sq ft and 25,000 sq ft alongside its superstores and supermarkets. It wants 100 such smaller stores by 2015.

Chief operating officer Andy Clarke said Asda learnt a lot from previous formats, including Essentials and George standalone high street stores, and the four formats it now operates are “an evolution which we are happy to push forward with”.

Collins Stewart analyst Greg Lawless says Asda has been slow to snap up stores. “It’s fair that Asda has been refining its formats but it didn’t buy the space when it was available and it will be a struggle to hit those targets without large groups of stores being put up for sale.”

Black says: “The Asda format is very pure, and it has a low cost per sq ft, but it hasn’t been flexible in developing formats to ensure it continues to grow share.”

He says Asda “missed out on not acquiring Safeway 10 years ago” and Morrisons scooping up Safeway was “more than a body blow to Asda”.

He points out that while Asda was late to format variation, Tesco stormed ahead with diverse space growth. Then when Somerfield/Co-operative and Woolworths stores came up for grabs, “Asda didn’t bite”.

He adds: “While Sainsbury’s and Morrisons did pay a lot for the Somerfield stores, they will be worth the money in the long run.”

However, Asda seems to have found the formats it wants to expand and will aggressively seek space. Kasoulis says: “Andy Bond is right when he says format development takes a long time but the formats that they are pushing forward with look impressive, so it is now just down to a big property challenge.”

Will Asda’s Everyday Low Prices positioning be enough to enable it to become the ‘clear number two’ in food?

A key part of Asda’s plan is to become the clear number two in food below Tesco and ahead of Sainsbury’s, which it has vied for second place with. Asda comes second in the Kantar Worldpanel market share figures, but has only had its narrow lead over Sainsbury’s thanks to non-food sales through its tills.

Bond was quick to point out that Asda has enhanced its credentials as a quality retailer as well as a low cost grocer and that “50% of our growth over the last four years has come from ABC1 shoppers”.

However, Asda’s position as a low-cost grocer has been clouded by intense promotional activity by it and rivals; Bond said “the whole industry has become too promotional”.

He said Asda will ditch high-low promotions in favour of a return to its roots - its Everyday Low Prices proposition. “When we move from an inflation to deflation market, the whole sector becomes more promotional, and that’s not easy for a EDLP retailer. We have to go faster and harder at EDLP,” he explained.

He added that by the end of next week Asda will strip out a “whole raft” of two-for-one deals and instead invest in being the lowest priced grocer. EDLP will also be the subject of a marketing campaign in the near future.

Coulter says Asda may benefit in that all the grocers may become more EDLP-focused because it is consistently found to be the cheapest. The increasing use of the internet by shoppers to determine price transparency is likely to help.

Bernstein analyst Christopher Hogbin agrees. “Asda’s determination to refocus on its long-standing EDLP positioning may actually help wean the UK grocery industry off its current high level of promotions that were perhaps more appropriate in the recent era of high inflation rather than the current period of low inflation and lower industry growth,” he says.

He adds that this strategy fits with comments made by rivals, such as Sainsbury’s, as a way to raise gross margins to compensate for lower revenue growth.

Others remain sceptical though. Lawless says: “Tesco is not going to take its eye off the ball for a second and not only does it have Clubcard up its sleeve, it will also change promotional tack quickly to derail its competitors.”

How can Asda drive its multichannel offer?

Asda wants to turn its multichannel offer into a “world class dotcom operation”, according to Bond. He points out that the online grocery operation accounts for £500m of sales at present but is operating at a fraction of its capability and there is “much to play for”.

Asda confirmed it will open its second home shopping centre - depots from where Asda picks online orders - in Enfield, north London, in summer, after the success of its first at Morley in Leeds. Asda executive development director Doug Gurr said the Enfield initiative will give Asda growth in areas where it has few stores, plus new lines will be added to non-food online including more George, and health and beauty.

“Collect in-store is critical to the growth of online,” says Gurr. “While we’re not the first grocer to do this, we will move at a pace.”

Collect in-store has been rolled out to all Asda’s shops, but it has also opened a new trial store in Bradford whereby shoppers will have a ‘take-home today’ option. The offer has electronic display points plus some physical products on show, totalling 3,500 SKUs for order and takeaway immediately.

Black says this trial “takes Asda directly into Argos territory” and “is a good way of utilising warehouse space and clearly shows Asda is improving its inventory control”.

He adds: “This is an interesting move by Asda and if it is rolled out quickly could bump up its non-food and multichannel offer substantially.”

How can Asda leverage the global power of Walmart?

Asda’s ambitions is to further leverage the buying power of its parent company Walmart. It has already made headway improving synergies with, for example, George becoming a Walmart global merchandising centre (GMC).

The GMCs will be used to design and source products that can then be distributed to different markets. Walmart and Asda have already started work on two global products - candles and towels. Asda commercial director for merchandising and sourcing Jon Wragg says: “In developing new products, we believe we can work on design ideas that can be used in different countries and work just as well.”

Wragg also said that if Asda wants to source new products, it can use Walmart’s partnership with supply chain giant Li & Fung. Working closer with Walmart will also mean it can cut out the middlemen more often.

Hogbin says the “key to longer term market share gains will increasingly be driven by Asda’s ability to leverage Walmart’s scale and capabilities”.

He adds: “Real progress is being made with the global merchandising centres, and there is a potential and material opportunity to have better product cost by leveraging Walmart in global sourcing, global products and global brands.”