In ASDA’s most recent results, CEO Andy Clarke said the discounters and a change of shopping habits had sent a “shockwave” through the supermarket sector.
The once-mighty Tesco (LSE: TSCO) has fallen far, with rapidly declining market share, eroding margins and an accounting scandal that has seen the company half in value.
But can the supermarkets survive and is Tesco a buy?
ASDA has been the stand-out performer of “The Big Four,” the only one holding out against the unrelenting discounters. But the tide could be turning. Last Wednesday ASDA reported its first fall in LFL sales, down 1.6% in Q3.
Today I’m going to roll up my sleeves and ask some questions about ASDA.
How did ASDA manage to survive sales decline for so long, can it continue to thrive in the discounting era and, if it can, is there anything Tesco can learn from it?
A Gap In The Market
People’s shopping habits are driven primarily by two factors: value and convenience.
ASDA’s strategy is built on the premise that customers want a better range and quality to choose from than those offered by the discounters, but for a lower price than the traditional supermarkets.
While investors eagerly await Tesco’s strategy under David Lewis, ASDA has been implementing this anti-discounter strategy for an entire year. In November 2013, the business committed £1bn to lowering prices and £250m to increasing quality.
Value and Convenience
People are flocking to the discounters because they are cheaper. It is that simple, and ASDA is determined to compete with them on price. It is owned by Wal-Mart (NYSE: WMT.US), and the scale of this global business can be leveraged to procure goods at cheaper prices, an advantage not shared by any of the other UK supermarkets.
ASDA also owns a company called International Procurement and Logistics, which focuses on building relationships directly with producers. This cuts out several supply chain steps, including the supplier’s mark-up. It has saved £190m since 2009, significant savings which is helping to fund the current pricing strategy.
While Tesco can’t rely on a Wal-Mart, it has considerable scale itself and could go down the route of sourcing directly from producers to support lower prices.
While the discounters currently offer better prices, the supermarkets have a more diverse offering, allowing you to buy everything under one roof. Even if you are part of a growing trend of shoppers avoiding cramped supermarkets, you can still get your weekly shop hassle-free from Asda or Tesco online.
ASDA expects £3bn sales annually from their website by 2018, with Click and Collect forming a significant part of this while Tesco already has a market-leading online presence with £2.5bn sales.
In 2009, only 29% of UK shoppers bought food three times or more a week. Now 49% of us do and no one wants to go to a supermarket for a small shop. Convenience stores are predicted to take in roughly a quarter of all UK food sales by 2019 and both companies are moving into the space. Tesco added 128 stores to its already impressive network in 2013 to total 1,867 convenience stores. ASDA has disappointingly not committed much to the convenience store trend, with Clarke vowing to explore the area over a five year period beginning last year.
While ASDA seems to have the upper hand on value, Tesco is leading the way on convenience and future shopping trends.
Tesco more convenient, ASDA cheaper
But who has the most comprehensive strategy?
I believe its ASDA. Value is clearly driving shoppers the most these days, and ASDA has spotted an unaddressed gap in the market.
However, I’m confident that Tesco’s strength in online and convenience gives it a solid platform if it can reduce prices.
Am I willing to back Tesco as a winner of this price war right now? No. But I believe Tesco could co-exist with ASDA in that space between supermarkets and discounters, even if they must take a significant hit to margins to do so.
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Zach Coffell has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.