{audio:0:00:00} 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?

{audio:0:00:41} 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.

{audio:0:02:33} 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.

{audio:0:03:47} 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?

{audio:0:04:14} 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.

{audio:0:06:13} 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.

{audio:0:07:44} 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.

{audio:0:09:41} 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?

{audio:0:10:31} 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.

{audio:0:16:51} 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.

{audio:0:18:02} 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?

{audio:0:18:16} “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?

{audio:0:23:35} 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?

{audio:0:24:47} You can’t give it oxygen.

{audio:0:24:50} Oxygen, remove the oxygen.

{audio:0:24:51} 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.

{audio:0:34:40} This raises the question today where Aldi and Lidl are a little less so, I think they have far fewer stores than Aldi in the U.S., but there may be a similar story playing out today with Wal Mart on its home territory. To get back to your comments in the early part of our call, you mentioned that the challenge for the incumbent retailers in the UK still remains. Aldi and Lidl are still growing like-for-like [sales]. They’re still taking market share. As we discussed, once the horse is out of the barn, it’s very hard to stop. What challenges does one face as someone within one of the major mainstream retailers? What challenges do you face now to meet this threat head on? What are the frictions you have to overcome in order to stop these discounters from growing?

{audio:0:35:54} A lot of it will come back to that recognition, that you’re going to have to do something different. That potentially, you’re going to have to rebase the profitability of the organization, but for the long-term.

{audio:0:36:10} A long-term rebasing of profitability.

{audio:0:36:15} A rebasing of profitability in the short to medium term to pay back in the long-term. I advocated at Asda, as we needed to spend 300 – 400 million pounds to rebase our price position. Again, particularly in the categories of meat, produce, bakery. The areas that customers buy on a regular basis. That would have rebased our profitability. We’d have seen an increase in volume and an increase in customers. How long it would have taken for those customers to react and to see a volume that would have delivered a same cash GP rather than just a percentage GP, is difficult to estimate. It comes back to a belief in direction because five years down the line, from me leaving Asda. I think they are probably operating at a similar profit level to what the rebasement would have been five years ago. The business is on a completely different trajectory. I also think whilst the collateral impact, take meat for example, we were losing 150-grand a week of switching from Asda to Aldi. £150,000 a week. You can track that through Neilsen, fairly sophisticated and pretty accurate. It was continuing to rise.

{audio:0:38:04} I think re-benchmarking our prices or repositioning our prices would have meant that we’d seen an influx, a stop of that loss. Also, we’d have won business from Morison’s, Sainsbury’s and Tesco. I think we’d have seen a double whammy. It’s as simple as that. We’ve already articulated that the grocery retail margins at six and seven percent were unsustainable when a competitor like Aldi comes into the market. Then there are bigger issues at play. Wal Mart acquired Asda in 99’. It represented eight percent of their turnover. I’m not sure exactly what percent of their profit, probably slightly more. Given the higher than average overall margins. Clearly, they didn’t demonstrate a support for Asda from probably around 2012/2013. In theory, the biggest grocery retailer in the world acquiring somebody in the UK. You may be thinking, they may look to pump/prime the business. There was no significant investment coming. As has played out now, they’ve been trying desperately to find a way to get rid of their stake.

{audio:0:39:35} Just to put our audience in the minds of an executive in the position that you were in, in the position that your peers were in a few years back, really you’re facing this really pretty difficult message, which is that to stem the growth of the discounters, the loss in your own share of market, that you really have to take an axe to the P&L and invest materially in price in an environment where there’s going to be a lot of pressure from the financial markets to drive short-term profitability. In an environment where there’s a lot of complacency that the conventional narrative is that discounters are nowhere near as much of a threat as they actually were. Or at least that was the sense at the time. Just to bring this to life, it looks like a really challenging situation for an executive to be in, to be arguing for a dramatic decrease in profitability, a hit to take in order to protect the long-term future of the business. That really takes us back if we put it in a nutshell, it’s a short-term versus long-term problem, is that fair?

{audio:0:40:48} Absolutely. This is where we all have to take a slight dose of the medicine and say, hang on a minute, 700 million is still not a bad profitability. We’ve paid all the costs and we’re left with 700 million at the end of the year. I used to argue, do you want to make one and a half billion? Do you want to make two billion? You’re facing, I’m not saying an existential threat here, but you’re facing a significant threat. You can see what’s happening with the numbers, you don’t need to be a rocket scientist to work out that we’re selling products for this, they’re selling them for that. Our quality is this, theirs is that. It’s not dissimilar. They’ve got lower operating costs because they keep it simpler than we do. That is a big challenge. We’ve got 400 stores that are all enormous and it’s very difficult to try and wind our way out of that. Bringing it to current day, as the business moves more and more online, those big bricks and mortar stores are going to become even more like [white] elephants as time moves on. What do you do? You just continue to lose share, or do you take a short, sharp shock treatment and recognize that you can’t kid yourself.

{audio:0:42:21} You can kid everybody else to an extent for a while, maybe some of the execs were trying to kid themselves that actually things were going to be all right. Apropos my earlier comments. “Aldi won’t be here one day; they can’t continue to stump this profitability and these price levels.” “They’re getting lots of turnover growth, but the bubble is going to burst.” The other cracking comment that I used to hear was, yes, “but their like for likes are slowing down.” Okay, their like for likes are slowing down. That’s an issue for us because there’s no more space in the UK for our model. It’s not [a problem] for Aldi because they’re building 70 new stores a year. “It’s okay, don’t worry about that because likes for likes are the only issue. Top line revenue doesn’t matter.” In fact, they’ve put another 150 stores down in the last two years. The market is not growing, the share is coming from us [market incumbents]. There was this idea, “look at the like for likes, they’re really slowing down.” This sense that everything was all right and would be all right. The short-termism of the market, the analysts, the shareholders, they have a lot to answer for in the positioning of a business and business strategy. I remember an individual, the founder of Iceland said to me a long time ago, the best thing I ever did was going public and it was the worst thing I ever did because I lost control of the business. When he bought the business back in 2005, he’s maintained it as a private company since then. He’s been able to do what he wants. He can make the investments he needs to make without somebody over his shoulder questioning everything he’s doing.

Hard Discounters vs Big Four UK Grocers: Asda Case Study

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

Hard Discounters vs Big Four UK Grocers: Asda Case Study

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

inpractise.com/articles/Asda-vs-discounters-karl-martin-may2020

Why is this interview interesting?

Executive Bio

Karl Martin

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

Interview Transcript

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