Asda Group Ltd. Business Information, Profile, and History

Company Perspectives:

We lead the way in giving UK customers the products they want at the lowest prices and continue to widen the price gap between our competitors. We have always been committed to keeping prices low, something our customers value and recognize.

History of Asda Group Ltd.

ASDA Group Ltd. operates as one of the largest food retailers in the United Kingdom. The company's stores sell a wide variety of merchandise including food and apparel, along with housewares, music, videos, and books. ASDA has approximately 259 stores in its arsenal--each averaging nearly 42,000 square feet with some as large as 100,000 square feet. The company, once known as a dairy conglomerate, was acquired by Wal-Mart Stores Inc. in 1999. Under its new parent's guidance, ASDA has been adding pharmacies, opticians, jewelry, and photo departments to its stores.

Early History

The origins of the ASDA Group are to be found in the efforts of English dairy farmers to protect themselves from falling milk prices after World War I. When wartime price controls were lifted and England began once again to import large quantities of European dairy products, local milk prices fell sharply and showed every sign of continuing to do so. Various legislative remedies were devised, but in the meantime a Yorkshire dairy farmer named J.W. Hindell led a number of his fellows in the creation of Hindell's Dairy Farmers Limited, a 1920 partnership whose purpose was to acquire or build both wholesale and retail outlets for their milk, in that way securing for themselves a steady market and a floor price.

During the next 25 years, Hindell's assembled a wide variety of dairy businesses, founding or purchasing a total of nine operating companies involved in everything from the raising of dairy cattle to the processing and distribution of milk and milk products, as well as the promotion of numerous cafes, retail milk shops, and bakeries.

By the time of World War II, Hindell's, headquartered in Leeds, had extended its interests across the Midlands and diversified as far as meatpacking and even the quarrying of lime. The partnership became a public company in March 1949, as Associated Dairies and Farm Stores Limited, which included some 26 farms, three dairies, two bakeries, 42 retail shops, and pork-butchering facilities. With 1,200 employees, Associated was already an important part of the relatively quiet economy of northern England.

Success in the 1960s-70s

The next 20 years saw a veritable blizzard of further acquisitions by Associated. Dairies and creameries too numerous to mention became part of the rapidly growing northern conglomerate, but beyond expanding profits, little changed at the company until 1965, when Associated created a subsidiary called ASDA Stores Limited. In that year, the parent company, by then known as Associated Dairies Limited, with sales of £13.5 million, was highly profitable and probably did not much concern itself with the tiny food-stores division, which at best could be expected to fill one more niche in the company's overall business plan.

As it turned out, however, the stores were an immediate and immense success. Associated had come up with a merchandising concept entirely new to England, and well tailored to the working-class cities in which it chiefly operated: the company opened extremely large, rather spartan stores in abandoned warehouses or mills, offering to the public a limited selection of goods at the lowest possible prices. These "edge-of-town" stores depended for their success on the rapid proliferation of the automobile in Great Britain and the accompanying decline in local consumer loyalties. As in America, the British public soon decided that it cared less about neighborhood vendors than low prices, and the automobile allowed them to act on their preference. Associated's warehouse stores were an enormous success, and the company quickly set about the program of expansion that would make it one of the leading retailers in the country.

The company thus found itself milking two kinds of cows, dairy and cash, and the latter, naturally, proved the more attractive as time passed. Associated continued to add to its dairy holdings, but it was apparent by the early 1970s that the ASDA Stores division would soon dwarf its parent. At that time, the stores were still operated in a rudimentary fashion, with little centralized administration, primitive marketing, and no attempt at attractive floor displays. But ASDA had pioneered not one but two new ideas in British food retailing, the edge-of-town location and the superstore size, and for a long time had the market to itself.

The company opened stores in Scotland and Wales, and began casting about for opportunities to invest its growing cash reserves. In 1972, ASDA entered the travel agency business, in 1977 it had a go at furniture with its purchase of the Wade's stores, and at various times in the decade it tried its hand at a number of other diversions, none of them successful and all of them eventually eliminated. But longtime Chairman Noel Stockdale could hardly be concerned about these minor setbacks; quite reasonably, he did not try to fix what was not broken, but continued building more superstores across the northern half of the country. By 1978, ASDA had 60 of these, and two years later they passed the £1 billion sales mark.

As is usually the case, however, the rest of the marketplace had not stood still in the meantime. With ASDA's runaway success as a model, the established grocery chains began building similar superstores at out-of-town locations, while London-area stores discovered that low prices were not enough to please more sophisticated shoppers. These shoppers wanted pleasant surroundings as well as low prices, and they soon got both in the more luxurious superstores opened by ASDA's rivals. As a result, by the early 1980s the ASDA format of high volume, low price, and no frills had come to seem dated and unappealing. Customer loyalty, never strong in the economy-store sector, shifted away from ASDA toward the chains more in tune with the new wave of unabashed materialism in Thatcher's England, leaving the Yorkshire firm in danger of an early death. In a period when everyone had a superstore, ASDA's were decidedly less "super" than the rest.

Changes in the 1980s

Such, at any rate, was the diagnosis of John Hardman when he became managing director of stores in June 1984. Although the company was in the midst of a profitable, £1.76 billion sales year, Hardman understood that the market had moved ahead of ASDA and would soon leave ASDA floundering in its wake. Hardman, therefore, proposed a radical repositioning of the ASDA chain, to include the following improvements. First, a completely new look was to be unveiled for all of the stores, replacing their stacked-carton, industrial brown decor with a new, appetizing green palette, dramatic lighting, dropped ceilings, and imaginative display racks. Second, the chain would introduce its own "ASDA Brand" line of foods, since private-label merchandising generally yielded substantially higher gross margins. Third, the stores were to adopt an EPOS system--electronic point-of-sale registers--to provide more efficient records and inventory control. Fourth, the company would build a centralized network of distribution warehouses, eliminating the scores of trucks that arrived each day at store loading docks. Fifth and last, ASDA would push toward the more affluent population in southern England and the London area, where relatively few superstores had as yet been built.

Around the same time Hardman was revamping its stores, ASDA made its largest acquisition to date. In 1985 the company purchased the leading retailer of furniture in the United Kingdom, a company known as MFI, which had sales of about £300 million a year. Company spokesmen at the time pointed to the two concerns' similar positions in the marketplace, since MFI also operated large, edge-of-town stores that sold low-priced goods; but financial analysts from the beginning doubted the wisdom of the merger, and in this case they were correct. After only two years of an up-and-down marriage, ASDA sold its partner in the largest management buyout in British history, receiving £453 million in cash plus 25 percent of the newly formed "Maxirace."

As a matter of fact, ASDA decided at that time to sell everything: under Hardman, now chairman, the company realized that its future lay in superstores and nothing but superstores and, therefore, sold off not only MFI but also Associated Fresh Foods, the modest dairy company that at one time had been Hindell's Dairy Farmers Limited--that is, ASDA's own parent. ASDA would henceforth focus solely on its newly revamped and expanded line of food stores, with the single exception of Allied, a chain of carpet and drapery stores that the Group was unable to sell and, therefore, retained.

At first, the superstore facelift and expansion program appeared to succeed in nearly every respect. ASDA Stores became known for their innovative design, large selection of fresh foods, and equally extensive nonfood offerings, the latter accounting for some 25 percent of total store sales. A system of nine central warehouses was completed, as was the installation of EPOS and a more advanced data processing network. Profits in the new and redecorated stores were significantly higher than in the older ones, due in part to the ever-increasing number of ASDA brand items on the shelves and the more efficient distribution system. The company continued its southern assault, opening an average of 12 to 15 new superstores each year, many of them in the crowded urban areas of the South. And, in the most dramatic proof yet of its commitment to the grocery business, ASDA acquired 62 of rival Gateway's superstores for £705 million. This mammoth purchase, in a single stroke, increased ASDA's selling area by 50 percent, from 5 million to 7.5 million square feet, and further solidified its position as one of the largest operators of superstores in the United Kingdom--the new stores were on average even larger than ASDA's.

Restructuring and the Wal-Mart Purchase: 1990s and Beyond

It became apparent in the early 1990s that ASDA had perhaps bit off more than it could chew as debt related to the Gateway acquisition continued to grow. During 1991, Hardman resigned amid a host of problems and Archie Norman was named his replacement. A 1991 Investors Chronicle article summed up ASDA's financial position, claiming the new CEO had "inherited a dangerously listing ship whose longer term future and prosperity are far from assured."

Under new leadership, ASDA spent the next several years restructuring company operations, revamping its brand image, broadening its product mix, and lowering its prices. Norman's efforts paid off--by 1995 pretax profits had increased by nearly three times over 1992's results. Success continued over the next several years, which prompted ASDA to once again seek out merger activity. The company turned to competitor Safeway plc in 1997, suggesting a union that would create the largest food retailer in the United Kingdom. The $14.5 billion deal fell through later that year.

Undeterred, ASDA continued to look for a deal that would give it an edge in the industry. Its opportunity came when U.S. retail giant Wal-Mart Stores Inc. made a $10.8 billion takeover bid for the company in June 1999. Wal-Mart's bid thwarted efforts made by Kingfisher plc, who had entered merger talks with ASDA earlier in the year. ASDA, however, was eager to join forces with Wal-Mart, the enormously successful U.S. company on which it had based so many of its business strategies. At the same time, Wal-Mart stood to gain handsomely from the deal. The ASDA acquisition was its largest international foray to date, instantly doubling its international sales. "Indeed, the company has set its sights on becoming a leading cross-border retailer in Europe," reported a 1999 Business Week article. "Wal-Mart wants a third of its growth over the next five years to come from international operations." This initiative placed ASDA in an enviable position among its competitors.

Bolstered by the recent takeover, ASDA experienced success in the early years of the new millennium. Almost immediately after the purchase ASDA adopted Wal-Mart's "price roll-back" program, thus igniting price wars among U.K. supermarket companies. ASDA opened its first store under the Wal-Mart banner in 2000 and launched Smart Price, a new brand based on Wal-Mart's Great Value and Sam's Choice well known brands.

By 2003, it had usurped competitor J Sainsbury plc from its number two position in the U.K. food retailing market. It hoped to grow even larger by adding 70 Safeway stores to its arsenal. The bidding process for Safeway was subject to a variety of regulatory issues, however, and ASDA eventually lost out to Wm Morrison Supermarkets plc. As a whole, the European retail sector was expected to experience a wave of consolidation in the coming years. With Wal-Mart--whose fiscal 2004 sales were $256.3 billion--as a parent, ASDA appeared to have a bright future.

Principal Competitors: J Sainsbury plc; Safeway plc; Tesco plc.

Chronology

• Key Dates:
• 1920: J.W. Hindell creates Hindell's Dairy Farmers Ltd.
• 1949: Associated Dairies and Farm Stores Ltd. becomes a public company.
• 1965: ASDA Stores Ltd., a food stores subsidiary, is created.
• 1985: MFI is acquired.
• 1987: Associated Fresh Foods is sold; MFI is sold in the largest management buyout in British history.
• 1989: ASDA buys 62 Gateway superstores.
• 1999: Wal-Mart Stores Inc. acquires ASDA.
• 2003: The company becomes the second largest food retailer in the United Kingdom.