Asda faces fresh challenges as supermarket price war looms

Allan Leighton, Asda’s executive chairman, is spearheading a bold strategy to rejuvenate Britain’s fourth-largest supermarket chain. Returning to Asda last November after a 24-year hiatus, Leighton is confronting a business in a vastly different state than when he first departed. Once the nation’s second-largest supermarket, Asda’s market share has slipped from 14.8 per cent to 12.6 per cent in just four years, with annual profits now less than half of the £423m recorded in 2000.

The pressures facing Asda are amplified by a colossal £3.8 billion debt inherited from a 2021 private equity acquisition by TDR Capital and the Issa brothers, Mohsin and Zuber. Finance costs alone reached £441m in 2023, significantly higher than the £396m incurred the previous year. To halt a slide threatening the company’s future, Leighton has announced a renewed supermarket price war, bolstered by a substantial investment aimed at cutting prices, improving product availability, and refurbishing stores.

Asda has remained tight-lipped about the precise figure earmarked for this initiative, but analysts estimate the investment may approach £900m over the next three years. Leighton has acknowledged that this aggressive approach will inevitably weigh on the supermarket’s short-term profits, leading to reduced jobs and bonuses for staff. Yet, he firmly believes this investment is critical for restoring Asda as the preferred choice of British shoppers. This strategy leans heavily on historical successes, with Leighton reviving the popular “Rollback” programme from the mid-1990s, which originally catapulted Asda into prominence with widespread price reductions.

Competition has, however, taken on a new intensity since those earlier successes. German supermarket giants Aldi and Lidl have captured much of the value-driven market once dominated by Asda. British chains such as Tesco and Sainsbury’s are also poised to retaliate with their own price cuts to remain competitive. Already, the announcement of Asda’s price war has shaken investor confidence across the retail sector, erasing over £4 billion in the combined valuations of supermarkets including Tesco, Sainsbury’s, and Marks & Spencer.

Retailers are grappling with the compounding effect of rising labour costs, driven by higher minimum wage thresholds and National Insurance hikes set to take effect in April. Supermarkets must also contend with resistance from suppliers, who face their own cost pressures and appear reluctant to lower prices further. Many, such as members of the Lea Valley Growers Association, assert that they would prefer to reduce production rather than absorb greater costs under supermarket demands.

While Asda’s rivals hold stronger positions, analysts suggest Asda may face significant challenges in recovering market leadership. Clive Black of Shore Capital notes that competitors such as Tesco are well-prepared, benefiting from volume growth and highly effective loyalty schemes. By contrast, Asda’s stores are still perceived as underperforming despite the infusion of new resources.

Leighton, undeterred, maintains that revitalising Asda is a long-term project. The emphasis, he states, is on “fixing the basics” rather than achieving quick wins, with a focus on better availability, lower prices, and enhanced customer experience. As the Rollback programme takes off for a second time, the question remains whether Asda can once again establish itself as Britain’s supermarket of choice.