Asda and Morrisons, based a few miles apart in northern England, boasted of new chapters at the start of the decade when the struggling supermarket chains were both taken over in debt-fuelled deals.
But after several years under private equity ownership their travails have only worsened as they grapple with higher than expected interest payments, leadership instability and shrinking sales in an increasingly competitive market.
“The challenge for private equity is the UK supermarket industry has huge turnovers and pretty modest profit margins — 2 or 3 per cent,” said one former boss of a UK supermarket group. “You can look at that and think, ‘we’re going to make more than that’, but gradually it begins to take its toll.”
Seduced by the grocers’ assets and the scope for lucrative deals, UK private equity firm TDR Capital and the billionaire Issa brothers bought Asda in 2020 for £6.8bn while US buyout group Clayton Dubilier & Rice acquired the smaller Morrisons a year later in a £10bn deal.
Their turnaround efforts, however, have been undermined by the jump in inflation and interest rates following Russia’s assault on Ukraine, which raised the annual cost of servicing their debt to hundreds of millions of pounds.
“Ownership changes mean you easily lose a year or two in focus,” said Ronny Gottschlich, a former UK chief of German low-price supermarket Lidl who is now an adviser. “Given the fierce competition from the discounters, but also a stronger Tesco and Sainsbury’s . . . this is valuable time they shouldn’t have lost.”
Asda, which last week cut bonuses for thousands of managers, made a pre-tax loss of £111.7mn in the nine months to the end of September on revenues of almost £20bn, according to the most recent documents for Bellis Finco, the holding company through which it is owned. Operating profit was £284mn while finance costs, including interest, were almost £440mn.
Morrisons said in January that pre-tax losses had halved last year to about £500mn on revenues of £15.3bn, while underlying profit, its preferred metric, had risen 11.2 per cent to £835mn.
“I think it’s the first time [in about] 20 years that we’ve had two mainstream grocers struggling like they have,” said Steve Dresser, chief executive of consultancy Grocery Insight.
Credit agency Moody’s recently warned Asda of a potential debt downgrade if performance did not improve. Both chains remain in junk territory. Asda has net debt of £3.8bn and Morrisons £3.1bn, down from £4.4bn and £5.6bn respectively at the time of acquisition.
Asda, which reports full-year results next week, told the Financial Times the Moody’s report had highlighted that it was “a larger and more diverse business than Morrisons, with a notably higher credit rating and stronger free cash flow generation”. However, the report also noted progress at Morrisons, where like-for-like sales rose 4.1 per cent last year.
To reduce leverage, the two companies have embarked on asset sales, including selling and leasing back some of their properties, and refinancing deals. Morrisons last year sold its petrol stations business to Motor Fuel Group, also owned by CD&R, and used £1.8bn of the proceeds to pay down debt, according to Moody’s.
Asda in 2023 paid £2bn to buy 350 petrol stations and 1,000 convenience stores from EG Group — a company also co-owned by the Issas and TDR that is considering listing in the US — a move that would allow TDR to cash out some of its investment more than a decade after first backing the brothers.
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Despite these measures, industry observers remain sceptical. Dresser likened sale and leasebacks to “selling your possessions to pay your mortgage, so I don’t think that’s really a strategy”, even though it has been a feature of the industry for many years.
Morrisons finance chief Joanna Goff recently said the retailer’s proportion of self-owned stores was the highest of its peers at 80 per cent, which “gives us options”. Asda’s freehold property portfolio is worth about £8.5bn and the deals it pursues are strategic, according to a person familiar with the company.
Both chains have insisted they have access to extra cash, no immediate refinancing needs and have sought growth through acquisitions.
But they have also faced operational issues, with their larger stores, typically cash-generative powerhouses, hit by product availability problems and declining store standards, pushing many shoppers to rivals.
Asda, which has blamed some of its problems on an £800mn IT decoupling from its previous US owner Walmart, accounts for 12.6 per cent of the UK grocery market, down from 14.8 per cent when the takeover completed in 2021.
Morrisons was overtaken in 2022 as the country’s fourth-largest supermarket by German discounter Aldi, and has an 8.6 per cent market share.
Meanwhile, market leaders Tesco and J Sainsbury have brought prices closer to those offered by Asda and Morrisons.
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Both chains are seeking to expand their presence in the growing convenience and online markets, and to improve the performance of larger stores.
Leadership instability has added to the companies’ travails. Asda’s turmoil has been particularly pronounced, with Mohsin Issa attracting criticism during his three-year tenure running Asda that ended in September.
One former senior employee said that while Issa was “charming”, he “underestimated how complex it is to run a business the size of Asda, and frankly overestimated his own ability to do so”.
Former chief executive Allan Leighton, who helped rescue Asda from the brink in the 1990s, rejoined as executive chair in November. His arrival has galvanised staff, according to the former employee. TDR is now searching for a chief executive, having previously failed to find a leader willing to work alongside Mohsin, according to three people familiar with the hiring process.
Asda and Issa declined to comment. A person familiar with the situation said that under Issa’s leadership Asda expanded into “convenience and food to go, and launched the Asda loyalty app. His role was never meant to be CEO or long term.”
Similarly, CD&R’s management of Morrisons has not been without struggles. Rami Baitiéh, the former Carrefour executive hired 16 months ago to revitalise the chain, has impressed the private equity firm.
“He’s a high-intensity guy, very operational, that’s what the business needs,” said one person familiar with his leadership approach.
But not everyone is a fan, with some observers concerned at the speed of Morrisons’ progress, especially in light of Asda’s underperformance.
“For Morrisons not to be capitalising on that . . . is a major red flag,” said Dresser.
The road ahead remains fraught with obstacles. The main question is how long the owners can afford to wait for a meaningful return on their investment.
Private equity peers and lenders have raised concerns about the timeline for TDR and CD&R’s exits and the strategies they may have to adopt to achieve them. CD&R anticipates holding Morrisons for about a decade while TDR’s ownership of Asda is expected to follow a similar path, according to people familiar with their strategies.
“Execution is key in retail . . . but for me the question is the exit,” said one private equity executive, noting that antitrust and political factors made consolidation in the industry difficult.
A person familiar with Asda added that the UK IPO market was “not great” and that it would be a struggle to list a UK supermarket elsewhere.
One hedge fund manager who specialises in distressed debt said the two private equity buyers had “really overpaid for Morrisons and Asda”.
He suggested Asda and Morrisons could sell more or all of their real estate to other private equity firms, saying that if they “get their price gap back and their stores aren’t dark and dingy, perhaps this turns them around”, while acknowledging such a move would leave “creditors behind with an over-levered shell”.
Despite the setbacks TDR, which together with the Issas stumped up just £200mn to buy Asda, and CD&R remain confident about achieving a good return on their investments.
Asda said it was determined to become “the supermarket of choice once again for hard-working families. We are impatient in our change mission but patient in understanding that it will take time for us to rebuild trust with our customers.”
CD&R, Morrisons and TDR declined to comment.
Additional reporting by Robert Smith
