Walmart has made no secret about its desire to end grocery operations in the United Kingdom in order to focus on higher-growth markets like India, China and Mexico. The retailer put forth a proposal in 2018 to merge Walmart Asda with Sainsbury’s in the United Kingdom, but regulators squashed that plan last year. Retail insiders are now wondering what’s next for Asda.
Economically, the UK is considered a mature market with little growth opportunity given the competitive landscape of discounters that have carved up market share resulting in diminishing returns for Asda, which is considered the No. 3 grocery retailer in the UK behind Tesco at No. 1 and Sainsbury’s at No. 2. Aldi and Lidl continue to exert pressure on UK grocery retailers and that is not expected to soon subside, according to Walter Loeb, a retail analyst and consultant.
He said Walmart’s options are limited given another merger is unlikely after the recent ruling by U.K. regulators blocked the Asda-Sainsbury’s deal on the reasoning that competition is better for consumers and one less competitor would mean higher prices at the national level. Loeb said Walmart could spin off Asda as a free-standing company and take it public, much like Walmex, the company’s subsidiary in Mexico and Central America. But that doesn’t help Walmart Asda improve market share where it has struggled to hold on to third place from the likes of Aldi and Lidl.
A similar position existed for Walmart in Brazil as it could not break out of third place in a country where growth was muted at best amid corruption and economic turmoil on a national scale. Walmart sold its Brazil interests to a private equity firm and took a loss on the deal. That option could also work with Asda, according to Loeb.
“The bottom line is that Walmart is likely to be out of this business in the UK I always regarded ASDA as a well-run company with quality food and imaginative general merchandise offerings. Some labels, like the George brand, even found a home in Walmart stores and added to the luster,” Loeb said.
Walmart president and CEO Doug McMillon has said previously the retail giant needs to right-size its global footprint and that will mean exits from some countries while investing in growing countries like India.
Asda has a rich talent well for Walmart U.S. Judith McKenna, CEO of Walmart International, and former chief operations officer at Walmart U.S., came from Asda. Tom Ward, senior vice president of digital operations, which includes online grocery, also came from Asda, as did Mark Ibbotson, executive vice president of Walmart Realty and Central Operations. Each of these execs worked on Walmart grocery pickup using the expertise they learned from Asda which has delivered groceries in the UK for 20 years. David Cheesewright, the former Walmart International CEO, also come to Walmart through Asda. Cheesewright is now working as a consultant to Walmart looking for artificial intelligence, machine learning and augmented reality applications that Walmart can scale.
Sainsbury’s and Asda have expressed disappointment in the blocked merger ruling but each side has said they will not seek judicial review of that ruling.
“We’re disappointed with their findings but will continue to find ways to put money back into customers’ pockets and deliver great quality and service in an ever-changing and demanding market. I have always been hugely aware that the last year has been an unsettling time for all of our colleagues and am immensely grateful for their commitment and dedication during that time. Our focus is now on the most important job we all have – delivering for our customers,” said Roger Burnley, CEO of Asda.
Sainsbury’s CEO Mike Coupe said the companies pursued the merger to lower prices for customers, and the regulator’s conclusion the merger would raise prices ignores the competitive nature of the nation’s grocery market.
IGD, a research firm, estimates the food and grocery market in the United Kingdom will grow by 14.6% over the next five years. They estimate the value by 2023 of the UK grocery market to be $285 billion. IGD reports the discount retailers are expected to make the biggest contribution to cash growth rising 37% to $41.092 billion. The growth will be driven by rapid expansion supported by upgrades to existing stores.
Walmart reports earnings on May 16 and analysts expect an update about future plans for Asda. Insiders say Walmart is not under the gun to unload Asda at any cost, so it could take time to explore options and continue to run the business.