Asda has had to make difficult calls to keep itself competitive, particularly in light of the ongoing challenge from the grocery discounters.

That competitive need is all the more important as Walmart’s British subsidiary is demonstrably lagging the market in terms of trading momentum, while its competitors turned in positive festive trading updates. It is likely that, in terms of like-for-like sales, Asda will be sitting at the root of the grocery league table.

While distressing for all those involved, Asda’s decision to undertake headcount reductions at its Leeds head office appears to be an understandable reaction to the need to be more competitive on the shopfloor, while also meeting the demands of its American owner to deliver the most satisfactory return on its considerable investment.

The decisions being taken in the UK are not in isolation, with Walmart announcing 269 shop closures in the Americas just last week.

“There is somewhat of an irony in Asda’s current predicament given that it was the first of the big four grocers to identify the challenge of the discounters”

Clive Black, Shore Capital

Asda’s imperative is that it needs to be more effective in-store. While not the sole victim for sure, we believe that Asda is particularly vulnerable to competitor attrition from the discounters, both of which have a larger than average customer base with a propensity to prioritise price value.

In this respect, there is somewhat of an irony in Asda’s current predicament given that it was the first of the big four grocers to identify the challenge of the discounters.

Asda was the first supermarket group to cut its prices rather than over-depend on price-matching, coupons, vouchers and all of the other bells and whistles that its competitors have been trying to wean off for approaching three years.

Asda moved first by revealing its £1bn programme of price cuts between 2013 and 2018 to underscore its value credentials – an initiative augmented late last year with an additional £500m investment.

Such investment has to be funded if profits are not to collapse.

Industry headwinds

Additionally, Asda and its peers face further headwinds in their operating channels from the combination of the apprentice levy, the business rates review – noting Asda has the largest proportional exposure to big stores – and the national living wage.

With trading going backwards, Asda also needs to manage the danger of negative operational gearing, which is a powerful force compressing margins, as found by its peers in recent years.

Billy Ocean made a hit of his song – the going has got tough and the tough now is getting going.

Clarke cutting his cloth

We’re pretty sure that chief executive Andy Clarke is the last man on the planet who would want to cut out hard working and effective colleagues. Such tough decisions are what leaders have to do in times of difficulty and we applaud Clarke for his determination to make Asda competitive.

In the long-run the human pain now should ultimately protect and ameliorate further suffering down the line, particularly at the front end of the business. Cloth cutting is a necessary evil of the industry.