London broker Jeffries has questioned whether Asda’s sales will rise quickly enough to meet the demands of its turnaround plan.
Last week, UK supermarket giant Asda announced a drop in yearly sales, alongside a significant turnaround plan aiming to bring the supermarket back to its roots.
Key to this plan is a significant investment in price and store quality, which Asda warned “materially” impact profit this year.
“Our objective is to be… five to 10 per cent lower price than any other supermarket business. That’s where we’ve been in the past, and that’s where our model really works,” returning boss Allan Leighton said on a results call last week.
But Jeffries analysts Frederick Wild, James Grzinic, and Bhumi Kanabar warned that the supermarket will struggle without a “significant volume response” to lower prices.
Analysts said that it is “far from sure” that a program of investment will not require an injection of cash from shareholders, and that “additional investments funded by suppliers will not be allowed to run ad infinitum without a significant volume response.”
“Near-term Asda volume growth is critical,” analysts said. “Much of the industry’s dynamics will be determined by Asda’s ability to improve volume growth over the next three to six months.”
“Google Trends and Kantar data show limited evidence of this to date.”
Asda to face tough competition from Tesco
Multiple brokers warned that Tesco and Sainbury’s, which have been the main recipients of Asda’s market share, will not give up ground to Asda lightly.
Jeffries said that Tesco “will not allow itself to concede its hard-fought price proposition, a large barrier to consumer shifts.”
Equity analyst at Shore Capital, Clive Black, added that “we need to remember… that the listed players are better grocers than Asda with a broader customer set, stronger balance sheets, and a will to remain competitive too”.
But Black said boss Allan Leighton return created “stronger messages… on the firm’s will to compete better.”
“With definitive management change – Big Al at the helm – there is a clear and necessary indication of intent to invest in the price and proposition. As a value-based superstore, this has been a long-time coming set against a sceptical and reluctant supply chain,” Black added.
“[Shore Capital] does not take a complacent stance but neither, we sense, will the listed players.”