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Every little helps?

  • 10May 18
  • Richard Dunbar Head of Macro Investment Research, Aberdeen Standard Investments

As Walmart effectively raises the white flag on UK food retailing with the merging of its Asda subsidiary into Sainsbury, now is a good time to reflect on how Walmart came to enter the UK market, and on the high expectations that accompanied its arrival.

Back in the heady days of 1999, it was generally thought that this all-seeing US retailer would transform the UK retail landscape. Surely our home-grown retailers would be no match for the US behemoth.

However, it certainly hasn’t ended up that way. Not for the first time, a retailer from one side of the pond has had difficulty translating its business model to a new and unfamiliar market.

Given the travails of the UK food retail sector over the past decade, it may be difficult for younger investors to believe that in 1999 Asda was subject to a bidding war. Walmart paid £6.7bn, a 50% premium to the undisturbed Asda share price and a substantial premium to Kingfisher’s bid for the company. Both the Walmart and Kingfisher offers serve as a reminder about how attractive the industry was then perceived to be. Walmart was eager to enter a seemingly attractive geographic market, while Kingfisher was equally eager to expand from its core DIY business into the food retailing market. To both, it seemed clear that the decent margins, high returns and steady growth would endure long into the future. The rest of the sector reacted  as one might have expected given this positive narrative around the Walmart bid, and the share prices of Tesco, Sainsbury, Boots and Storehouse (remember them!) slumped.

It was accepted wisdom at the time that Walmart’s “pile it high, sell it cheap” strategy would transform UK food and general retailing. Eventually, this strategy did indeed transform the market – but unfortunately for shareholders in Walmart and the other UK food retailers, that strategy did not come from Walmart, but from Aldi and Lidl, both little-known discount chains.

The German insurgents duly transformed the market by offering lower prices than even the perceived low cost incumbents, high gross margins (particularly on private label products) and low cost operations. This proved to be a heady cocktail. Aldi and Lidl were given a helping hand in the shape of some catastrophic M&A activity from the large incumbents, by margins that turned out to be illusory and by some expensive and over-optimistic overseas forays from some of the sector leaders. It is also worth bearing in mind that all these mistakes and misjudgements by boards (and investors) were before one even factored in the impact of online retailing to the retail mix.

History repeating?

The “obvious” trends identified by clever analysts and expensive boards may not necessarily be the most important things.

So what lessons should we learn from this particular period of corporate history? First, that forecasting the future is, to put it mildly, difficult. Second, that retailing is also difficult – very few have done it well over long periods and very few have been consistently good readers of a sometimes fickle, ever-changing consumer. Third, that retailing away from your “home market” is hard – and few have succeeded (Lidl and Aldi notwithstanding). And finally, that the “obvious” trends identified by clever analysts and expensive boards may not necessarily be the most important things.

And so as we see M&A approach new highs in the sector, as we see the consensus continuing to extrapolate what we have seen for the past few years, and as we see enthusiasm of the coming together of “bricks and clicks” – remember the misplaced enthusiasm of the consensus 20 years ago. And also, bear in mind the real winner of the bidding war for Asda was one Geoff Mulcahy, the chief executive of Kingfisher – who was unsuccessful in his bid.