Full interview at inpractise.com

We recently interviewed the former Vice President at Asda (responsible for fresh food, chilled food and frozen, categories with combined revenue of ~GBP 8bn and gross profit of ~GBP 3bn from 2010-15) on the subject of competitive strategy in food retail.

We explored in detail what it was like to compete with hard discounters Aldi and Lidl, and covered a range of other topics in the conversation:

  • Asda's historical customer value proposition (historical KPIs through which Asda operationalised its customer proposition and measured performance)
  • Asda's approach to price positioning in 2010: how Asda had lost touch with its price leadership proposition vs Aldi and Lidl
  • Mainstream retailers vs the hard discounters in the UK: how the UK grocery retail industry is still struggling to grasp the impact of the hard discounters on the market
  • How to stop a discounter: From the perspective of a mainstream retailer, why price is such an important variable when competing with a discounter and how price re-basing and profitability re-basing is the surest way to stop a discounter from taking market share
  • Competing against hard discounters: a perspective on the disadvantages of being publicly listed

In terms of responding to the threat here, the discounter model has now been studied. If it wasn’t at the time obvious, it’s more obvious now as to exactly how these businesses function, the role of private ownership, the extent to which they have a very long-term horizon, as they look to grow their businesses. Their price proposition, the economics of their model. This really radical and very clear focus on containing operational costs. Taking costs out of the business, which one could contrast with maybe a mainstream retailer focused on sales growth. Now that that’s better understood, could you take us through what a playbook for stopping a discounter looks like for a mainstream retailer?

You can’t give it oxygen.

Oxygen, remove the oxygen.

Remove the oxygen. At what stage you have to do that is a big topic and debate. I haven’t really got the answer. I’ve got some suggestions and some thoughts on it.

This raises the question today where Aldi and Lidl are a little less so, I think they have far fewer stores than Aldi in the U.S., but there may be a similar story playing out today with Wal Mart on its home territory. To get back to your comments in the early part of our call, you mentioned that the challenge for the incumbent retailers in the UK still remains. Aldi and Lidl are still growing like-for-like [sales]. They’re still taking market share. As we discussed, once the horse is out of the barn, it’s very hard to stop. What challenges does one face as someone within one of the major mainstream retailers? What challenges do you face now to meet this threat head on? What are the frictions you have to overcome in order to stop these discounters from growing?

A lot of it will come back to that recognition, that you’re going to have to do something different. That potentially, you’re going to have to rebase the profitability of the organization, but for the long-term.

A long-term rebasing of profitability.

A rebasing of profitability in the short to medium term to pay back in the long-term. I advocated at Asda, as we needed to spend 300 – 400 million pounds to rebase our price position. Again, particularly in the categories of meat, produce, bakery. The areas that customers buy on a regular basis. That would have rebased our profitability. We’d have seen an increase in volume and an increase in customers. How long it would have taken for those customers to react and to see a volume that would have delivered a same cash GP rather than just a percentage GP, is difficult to estimate. It comes back to a belief in direction because five years down the line, from me leaving Asda. I think they are probably operating at a similar profit level to what the rebasement would have been five years ago. The business is on a completely different trajectory. I also think whilst the collateral impact, take meat for example, we were losing 150-grand a week of switching from Asda to Aldi. £150,000 a week. You can track that through Neilsen, fairly sophisticated and pretty accurate. It was continuing to rise.

I think re-benchmarking our prices or repositioning our prices would have meant that we’d seen an influx, a stop of that loss. Also, we’d have won business from Morison’s, Sainsbury’s and Tesco. I think we’d have seen a double whammy. It’s as simple as that. We’ve already articulated that the grocery retail margins at six and seven percent were unsustainable when a competitor like Aldi comes into the market. Then there are bigger issues at play. Wal Mart acquired Asda in 99’. It represented eight percent of their turnover. I’m not sure exactly what percent of their profit, probably slightly more. Given the higher than average overall margins. Clearly, they didn’t demonstrate a support for Asda from probably around 2012/2013. In theory, the biggest grocery retailer in the world acquiring somebody in the UK. You may be thinking, they may look to pump/prime the business. There was no significant investment coming. As has played out now, they’ve been trying desperately to find a way to get rid of their stake.