Hard Discounters vs Big Four UK Grocers: Asda Case Study | In Practise

Hard Discounters vs Big Four UK Grocers: Asda Case Study

Former Vice President, Fresh, Frozen & Chilled at Asda and former Buying Director, Iceland Foods

Learning outcomes

  • Asda's historical customer value proposition (historical KPIs through which Asda operationalized its customer proposition and measured performance)
  • Asda's approach to price positioning in 2010: how Asda had lost touch with its price leadership proposition versus Aldi and Lidl
  • Mainstream retailers vs the hard discounters in the UK: how the UK grocery retail industry is still struggling to grasp the impact of the hard discounters on the market
  • How to stop a discounter: from the perspective of a mainstream retailer, why price is such an important variable when competing with a discounter and how price re-basing and profitability re-basing is the surest way to stop a discounter from taking market share
  • Competing against hard discounters: a perspective on the disadvantages of being publicly listed
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Executive Bio

Karl Martin

Former Vice President, Fresh, Frozen & Chilled at Asda and former Buying Director, Iceland Foods

Karl has spent the majority of his career in food retailing, joining Sainsbury’s after graduating in the mid 1980s to work in the trading department. He joined Iceland in 1992 to eventually become trading director, responsible for all buying, with a position on the board of the company. After 5 years in senior commercial positions at UK facilities management business Sodexo, in 2010 Karl joined Asda, the UK’s second largest food retailer, to run the food trading team. At Asda he was responsible for fresh food, chilled food and frozen, categories with combined revenue of ~GBP 8bn and gross profit of ~GBP 3bn. Since leaving Asda Karl has taken on a range of consultancy roles, including a year working for Sainsbury’s Netto discounter concept, where he gained deep insight into the discounter retail format. Read more

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Karl, we spent a bit of time the other week speaking about leadership in detail and drawing on some of the most important moments and experiences in your career. For today, to dive into the industry that you spent most of your working life in, could we set the scene for our conversation with your description of Asda’s customer value proposition within the UK food retail market?

Asda has always seen itself as being the value player amongst the big four retailers. Value being a combination of a number of different factors. Primarily, price. Go back to the 70s and 80s with the pocket tap, Asda price rooted in northern heartlands. That price position has always been incredibly important to the business. It measures itself on five criteria. What it calls its five customer pledges. It’s price proposition and it’s price advantage or disadvantage over its competitors. Its quality position, the two combined give value. Its position on availability, defined by two or three ways. Defined by the way in which you interact with the business. Bricks and mortar, online, click and collect. Size of store, whether it’s a large hypermarket, whether it’s a supermarket, whether it’s in some instances a smaller type operation. Its position on its newness, offers and ranges and events driven Christmas, Easter, Valentines, Mother’s Day, and its position regarding those vis-a-vis its competition.

Then its service proposition. Those pledges are measured every week. Some are very hard and fast. Availability is a hard and fast measure. Measured by a reporting system called OSCA, on shelf customer availability. Price is measured on a weekly basis by pulling all of the data from every other retailer, or certainly at that time, the big four retailers. Measurement on quality is a little bit more qualitative rather than hard, fast data. Queue lengths are measured by an external organization. Every week, first report on a Monday is that report. That’s how it measures its proposition across those five pledges. Price being the most important. The relationship between its price position in the market and its sales and its customer participation or customer count during that week or any given week. There is a direct relationship between the two.

What would be a typical conversation that you might have with other senior executives on the value proposition and what everyone was really driving towards?

When I joined in April 2010, the business had been using Moneysupermarket.com, for about three or four years as its price benchmark versus its competitors. You walked into every store at any given week and they’d be a big banner outside, or a big board outside saying: We were cheapest on 20,000 SKUs [Stock Keeping Units] out of the 32,000 you’re going to buy in store today. As measured by Moneysupermarket.co.uk. It had become a bit tired with customers. Let me concentrate there because I think the market context at the time led to some degree of complacency. The price message was clearly the most discussed and talked about. The business recognized that it was never going to win the battle of perceived quality. Despite the fact they felt they had some good quality products; it was never going to be a platform they could go out on. However, at that time, the price gap to Tesco was about five or six [percent], gap to Morrison’s was probably about six or seven and the gap to Sainsbury’s was probably about nine. They weren’t interested in the discounters. There was no price comparison with any of the discount operators at all in the weekly pricing review, which was a well-engineered and oiled process, which scraped prices from other retailers’ websites at least twice a week and reported back to the traders and to the wider business. They weren’t collecting any comparative data with Aldi and Lidl.

It was an interesting phenomenon because you had that three or four years of fairly significant inflation, the highest levels of inflation in food retail probably for the last 25 years. During that 06’ to 2011 period. It’s the old adage in retail, a rising tide lifts all boats. Everybody’s sales revenues were beating plan because nobody had really anticipated that level of food inflation coming through the mix.

Everybody was patting themselves on the back and saying, “We’re doing really well.” Of course, what happened in the 2011/2012 was there was a huge stepdown. In fact, by 2015, the market was in about 1.5 percent deflation. A five or six percent swing, which all of a sudden created this real sense of what’s happened to the top-line revenues? Six percent of it was inflation. The same time, you had the discounters getting stronger and stronger. When I joined in 2010, the discounters between Aldi and Lidl had about 5 or 6 share and by the time I left in 2015, it was 11 or 12 percent. A considerable growth. Whilst there was a lot of talk about price proposition being the most important metric for the Asda value proposition.

If you walked into the Atrium at head office in Leads, everywhere was emblazoned with these messages: Saving you money. Asda’s purpose: Save customers’ money. We are the cheapest supermarket retailer in the UK. Yet, it wasn’t true. I joined and was faced with a position where volume in a lot of key categories were in significant decline. Whilst the top-line was okay, even in 2010, the volume perspective was struggling. From a supplier perspective, volume is everything. Value means nothing. What I sell this bottle for means nothing to a manufacturer. I can sell it for two pounds, fair enough. If I can only sell it for a pound, it doesn’t mean anything to me [as a supplier].

The volume I shift, it’s important. It drives their costs and drives the customer retailer operation. What we were seeing was declining volumes. Giving a very specific example on milk, we had a rebated deal to sell 400 million liters of milk a year. We were annualizing in April of 2010 about 340. About ten percent below where we needed to be. Within my first week, I said to the business, we need to go out and do a real benchmark of Aldi and Lidl’s price. Just establish where we are. What’s reality? It was a 20 [percent] gap. The business saying to itself: We are the value proposition in the marketplace but only measuring itself against Tesco, Morrison’s, and Sainsbury’s. An obsession with the other big three. Allowing these discounters to just steadily grow. Get more sites without any pressure.

Can you give us a sense for the feeling in the industry? From the outside in, in analyzing this industry, the early 2000s, a lot of people talk about the golden age for UK food retail, margins in the UK were materially higher on an international benchmark comparison. We were seeing six/seven/seven and a half percent EBITDA margins for retailers versus in healthy markets around four or five percent. A lot of experimentation with online. To get us into that golden age mentality, is that part of the story here in complacency around discounters. What did it feel like to be an executive in this industry at the time and what were you coming into in terms of attitudes?

If I explained a little bit, 30 seconds on my career. I was with Iceland from 92’ to 2005. I then left food and retail for about five years. I was involved in support services. Still in commercial and procurement and supply chains, but in a very different market. I came back into retail in 2010. That five years. My response to the question is that UK food retail is probably the most sophisticated and well-developed market in the world. In range selection, and in development of premiumization. The whole tailoring of brands. You’ve got branded players. Let’s put them to one side for a minute.

Then you’ve got the development by Tesco in the 90s of the value propositions sparked by Kwik Save moving to 'no frills', which was a direct assault on own label margins. A typical retailer sitting there saying right, in the 2000s, we’ve got a value proposition: Tesco value, Sainsbury’s basics, Asda farm stores. Then you’ve got the own label. Then the premiumization. [Asda’s ]Extra Special. [Sainsbury’s] Taste the Difference. [Tesco’s] Finest. Getting customers to trade up to the higher level of proposition and margin. Not only in terms of margin but in terms of cash spend, as well. Incredibly sophisticated merchandising and planning systems to ensure that optimized ranges were being put onto shelves. All of that was going on from the late 90s through the early 2000s.

I think Aldi opened its first door in the UK in 1990 and really did nothing for about 10 to 15 years. Just sat there with half a dozen, maybe a bit more than that, let’s say a handful of shops with a fairly uninspiring offer. I think what they suddenly realized was these guys are operating at six and seven percent margins. Getting incredibly rich. Fighting amongst themselves. Tesco seems to be winning at 31 percent share. Asda and Sainsbury’s 15/16/18, Morrison’s 12. We can come into this market with our proposition and really make a difference and undercut at the standard own label.

The way in which you’re able to manipulate the ranges and manipulate the offer is phenomenal. The way you’re able to sweat the asset and drive out these enormous sales per square foot compared to anywhere else in the world, which ultimately is the true measure of a retailer’s profitability. The sales it can generate from its space. That whole model has been undermined. Customers are shopping differently. Starting to shop more online, although, it’s still only eight to ten percent of the overall mix. Probably be more after we come out of Covid. Aldi’s ability to have a cheaper offer. Even then, I’m adding more SKUs into their offer. They’ve got to specially select a range and they’ve added more brands, which potentially longer term could be a potential downside for them, as sales per SKUs start to drop. Yes, I honestly believe there was a high degree of complacency kicked in. It’s very difficult once you lose some momentum in an organization to start to wrestle it back.

To put that in a nutshell, what would you describe as a typical perspective that you would hear among your peers at an incumbent about Aldi and Lidl around 2010?

“The prices will have to go up eventually;” “They can’t sustain this level of price.” Yes. Another individual from the industry, even less than a year ago said to me, “But one day they’re going to have to make some money. Aldi in particular have added five billion pounds’ worth of sales to their business in the last five years, but they’re making 50 million pounds less.” To my mind, that says: “[we as incumbents are] doing a good job. One day [the discounters] bubble is going to burst.” [What the incumbents are not saying is] shit, what are we going to do to try and compete with that? What are our options?

In terms of responding to the threat here, the discounter model has now been studied. If it wasn’t at the time obvious, it’s more obvious now as to exactly how these businesses function, the role of private ownership, the extent to which they have a very long-term horizon, as they look to grow their businesses. Their price proposition, the economics of their model. This really radical and very clear focus on containing operational costs. Taking costs out of the business, which one could contrast with maybe a mainstream retailer focused on sales growth. Now that that’s better understood, could you take us through what a playbook for stopping a discounter looks like for a mainstream retailer?

You can’t give it oxygen.

Oxygen, remove the oxygen.

Remove the oxygen. At what stage you have to do that is a big topic and debate. I haven’t really got the answer. I’ve got some suggestions and some thoughts on it.

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