Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
“Over the top” and “energising” described the leadership style of Asda executive chair Allan Leighton in one recent profile. The UK business veteran, who revived privately owned Asda during his first stint at the grocer in the 1990s, has certainly got investors’ pulses racing since boomeranging back in November — and not always in a good way.
Shares in Asda’s listed rivals Tesco and J Sainsbury have fallen by about 5 per cent since mid-March, when Leighton said he would swallow a “material” hit to profits this year as Asda seeks to win back shoppers.
Jitters are understandable, of course. Leighton — who earned the nickname Asda’s “comeback kid” — is a seasoned retailer. In January, he resurrected Asda’s “rollback” pricing strategy — a successful hallmark of his first tenure, when he was chief executive between 1996 and 2000. Rollback products are put on promotion for up to 12 weeks before settling below the original price.
Retail investors are still scarred by memories of the entrance of Aldi and Lidl, which proceeded to rip up the UK market. Any hint of price competition in an industry where operating margins are tight — at about 4.4 per cent at Tesco on Visible Alpha data — is liable to spook them. The prospect of soft UK economic growth and big increases in employment costs are adding to the nerves.
Yet Asda’s listed rivals are in a decent position to weather any storm. Even when consumer confidence is weak, spending on groceries tends to prove resilient. Indeed, PwC survey data suggests some 44 per cent of shoppers intend to spend more on food in the coming year.
There are also few signs, as yet, that this will be all-out war. Grocery price inflation rose slightly to 3.5 per cent in March on Kantar estimates. The scale of Asda’s price investment is unknown. Spending will go into sprucing up its tired stores, not just discounting.
Investors will no doubt look for signs of caution when market leader Tesco reports annual results on April 10. Yet, even if any discounting one-upmanship accelerates, Tesco has free cash flow on its side. This is expected to be £1.8bn from its retail business for its 2025/26 financial year. Asda’s free cash flow, by comparison, is about £600mn. That should provide Tesco with ample change for an energised defence.
nathalie.thomas@ft.com
