UK Retail Briefing: Inc Impact of COVID-19 - October 2020
Analyst Comment: Walmart waves goodbye to the UK as Asda finds new owners 
 
“After almost two years of rumours Walmart has finally sold Asda in a £6.8 billion deal to the Issa brothers and private equity firm TDR Capital. The deal takes Asda both private and into British ownership for the first time in 20 years, and marks the start of a new chapter for Britain’s third largest grocer”
-For more see: Supermarkets – UK, November 2019, Convenience Stores: Inc Impact of COVID-19 – UK, June 2020

What we’ve seen
●	In April 2018 Asda and Sainsbury’s announced their intention to merge. The deal would have created the second largest retailer within the UK and fundamentally shifted the landscape of the UK grocery sector.
●	The deal was subject to an investigation by the Competition and Markets Authority (CMA), with the initial Phase 2 report, published in February 2019, throwing the deal into doubt and it being ultimately blocked by the CMA in May 2019.
●	Since this point Walmart has continued to seek new ownership for Asda, with the bid from the Issa brothers and TDR Capital emerging as the front runner earlier in 2020.

The end of an era for Walmart
Asda in the 1990s was a business that had been pulled back from the brink by Archie Norman and would have entered the 2000s in the ascendency, irrespective of Walmart or not. However when Walmart acquired Asda for £6.7 billion in 1999, outbidding Kingfisher in what would have been a fascinating sliding doors moment, there was significant concern from rivals in the sector about what the influence of one of the world’s largest retailer would mean for the landscape of UK grocery.

Walmart has had a successful tenureship of Asda, but it was ultimately not the game changer many at the time suggested. At the point Walmart took over ownership of the retailer Asda was the third largest grocer (see: Food Retailing – UK, June 1999) and its stewardship of the retailer will end with the business in a very similar position. This may be a harsh view, given how much Asda has modernised and developed under Walmart, but it has not, as some expected, challenged Tesco for dominance of the grocery sector.

Of course simply looking at the start and end point does not paint the full picture. The graph below charts the annual growth in all major grocers’ retail sales and those of Asda. What it clearly depicts is the tale of two halves that Walmart’s ownership of Asda has broadly fallen into – significant growth ahead of the market in the 2000s, before underperformance in the 2010s.

FIGURE 1: Annual % change in all major food retailers sales and Asda, 1998-2018
  
Source: Office for National Statistics/Mintel Retail Interactive

Indeed the 2000s brought significant success for Asda, at least in retrospect. The business grew significantly ahead of the market, helped by the expansion of its store estate from 232 in 1999 to 385 in 2010. Walmart’s influence was felt in this area, with Asda opening some of the largest stores, the ‘Supercentres’, the UK had seen to date with overall in this period the average size of an Asda growing from 42,500 sq ft in 1999 to 54,000 sq ft in 2010.

The influence of Walmart was particularly felt in non-foods during this period. George was expanded and invested in significantly not just in the UK but was also exported into Walmart’s international operations. The standalone George stores proved to be a failed experiment, with the last closing in 2008, but Asda Living, Asda’s GM format which initially was touted for 100s of stores before the recession hit, has fared better with 33 stores still trading under the name.

FIGURE 2: Asda Supercentre, Watford 2014
  
Source: Mintel

2012-13 represented the peak of Asda’s market share under Walmart, but the 2010s would prove more difficult than successful for the business. The strengths that the Walmart influence had instilled in the 2000s, such as larger stores and price competitiveness, were either not the strength they once were or were being eroded by the competition. The Netto deal in 2010 was in part a deal to look to rectify this, and it did bring a tranche of smaller supermarkets into the business but it was not enough to offset the impact convenience retailing was to have over the 2010s.

The shift in the 2010s to more fluid and frequent grocery shopping behaviours naturally hit the largest stores in the grocery sector the hardest, and Asda was not alone in feeling this effect. However without the convenience operation of the likes of Tesco and Sainsbury’s it was more exposed. The first  standalone petrol station store was opened in 2013 as a reaction to this trend, but such stores were not enough to offset the hit to basket sizes in its largest stores. Online was, and continues to be, a major strength through this period – Asda was an early adopter of online, pre-dating even the acquisition by Walmart, but from a UK first launch of click-and-collect in 2011 the business invested heavily in this area.

FIGURE 3: Asda click-and-collect, Colindale 2015
  
Source: Mintel

Alongside this behavioural shift was, and to a degree encouraged by, the rise of the discounters. Asda had always traded heavily on being the lowest cost retailer and naturally more competition hit it the hardest out of the big-four, particularly given the early focus of the discounters on expansion into its heartlands in the North. Asda has fought back, investing in own-brand and further sharpening its prices, but it has come at margin cost – with operating margins falling from a high of 4.5% in 2009 to 3.5% in 2018.

These two trends eroded Asda’s market share, sales fell consistently between 2014 and 2016 and at the time of the Sainsbury’s and Asda announcement the businesses sales were still 1.8% lower than they had been at the peak of 2013. Aldi and Lidl had sucked up what significant growth opportunities there had been in the UK market and it was clear that faced with problems at home, Walmart’s focus had drifted away from many of its international operations and Walmart looked to limit its exposure in these areas. At the same time of trying to divest from the UK, Walmart was working on similar deals in Brazil and Japan.

The deal and the new owners
Asda’s performance may have picked up since 2018 but with Walmart set on divesting, as we wrote in Sainsbury’s and Asda suffer critical blow from the CMA when the Sainsbury’s deal collapsed, it had broadly two options – sale into private ownership, and likely private equity, or to float the business. Both have their benefits, and downsides, but private ownership does allow an element, dependent on the owner, of freedom and a lack of forensic scrutiny on the bottom line which can be an key advantage in the sector.  

It has ended up being private ownership that has allowed Walmart to exit Asda. However before we profile the new owners it is important to highlight that Walmart does retain a minority share in the business, and a seat on the board. This is important for a number of reasons. Firstly it allows the new ownership continued access to the Walmart supply chain, crucial to keep the brand price competitive, and secondly it avoids a likely costly overhaul of IT and other systems ensuring the new ownership does not have to start from scratch and can hit the ground running.

In terms of the new ownership team, few would have been familiar with either side of ahead of the announcement of the takeover.

TDR Capital is a private equity business, and is no stranger to retail having acquired the 1,800 store European discounter NKD Group in May 2019. TDR also holds investments in David Lloyd Leisure and Stone Gate Pub Company, which operates among other the Slug & Lettuce, Yates and Walkabout chains.

TDR is also no stranger to the other half of the acquisition bid, the Issa brothers. The frontmen of the deal Moshin and Zuber Issa are the founders of Euro Garages – a UK based chain of petrol stations. In 2016 Euro Garages merged with European Forecourt Retail Group (EFR), then owned by TDR, to create EG Group. Each of the brothers own 25% of EG Group parent Optima Bidco and TDR the remaining 50%.

Moshin and Zuber Issa remain co-CEOs of EG Group and it is has achieved impressive growth in recent years, as demonstrated by the table below, with sales growing from £3.2 billion in 2016 to £20.0 billion in the past four years.

Of course such a rate of growth does not come naturally, and the group has acquired numerous operations around the world. At the time of the merger Euro Garages operated in the UK and EFR operated from around 1,100 sites in France and Benelux. In the intervening period acquisitions have grown the number of sites to around 4,000 in Europe, a thousand in the USA and 500 in Australia among other regions. Margins have been squeezed as the price of fuel has fluctuated, but operating at thin margins will hold the new owners in good stead in the grocery sector – even if Asda boasts some of the strongest in the market.

FIGURE 4: EGR Group, Key Company Financials, 2016-19
 
 Year to December  	2016 	2017 	2018 	2019 	
  	€ 	€ 	€ 	€ 	
Revenue 	3,162	5,156	12,005	20,018	
Operating profit  	122	180	308	417	
Operating margin (%) 	3.9	3.50	2.6	2.1	
Number of sites  	1,500	4,400	5,225	c. 6,000	

Source: Company reports and accounts/Mintel

What will they bring to Asda?
The Issa brothers are the no doubt the front men of the deal and they bring with them impressive credentials and some knowledge of the grocery sector. What is clear from the announcement is that they will not look to overhaul Asda, in at least the medium term. The senior management is staying in place, and the tone of the announcement is one of continuity rather than wholesale change.

The two standout points from the announcement are the pledge of £1 billion in investment over three years and a pledge to increase the proportion of goods sourced from UK suppliers.

The former is important, particularly if aimed at improving some stores which sorely need a face lift, but the latter indicates a good understanding of the current market. Data from Mintel’s upcoming Supermarkets: inc Impact of COVID-19 – UK, November 2020 Report found that 53% of grocery shoppers say they have tried to buy more British-sourced products since the COVID-19 outbreak began. British sourcing has always been important, and has moved up the consumer agenda in recent years, however the pandemic has accelerated this and with the final terms of Brexit and the UK’s relationship with the EU to come into greater focus in the final quarter, this is a trend which will only further gain importance.

Experience in the forecourt convenience sector
One key area the new owners may bring is greater access and/or future investment into the convenience sector – the sector which has contributed to Asda’s fall in share in recent years. Indeed the Issa brothers and EG are already active within the grocery sector. As the chart below highlights whilst a majority of EG revenues come from fuel 14%, or €2.8 billion, comes from grocery and general merchandise sales.

Further data from the latest, to December 2018, Euro Garages UK accounts reveals than EG’s operations in the UK include £229.5 million in grocery and general merchandise sales, alongside £166.0 million in food-to-go sales. This retail figure means that already the Issa brothers operate a grocery operation in the top 30 largest in the UK, and in the top 150 retailers overall.

Asda is already active in the petrol station market, as of 2019 it operates 324 petrol forecourts the majority of which are located on supermarket sites but this does include 18 independent sites, and has long seen this as a cost-effective way of adding a convenience dimension to its operations. It also had a standing relationship with EG Group prior to the acquisition, in 2019 Asda struck a deal with the Group to ‘deliver an enhanced customer experience’ at 30 sites and in September 2020 it was announced that three EG sites would trial the new Asda On The Move fascia.   

Now in the same fold as one of Europe leaders in that sector there is obvious commonalities and potential boost to that side of the Asda businesses simply from the sharing of best practice. More than this it is easy to see how the 500 petrol station estate of Euro Garages could be harnessed to further Asda’s market leading click-and-collect operation in the future.

FIGURE 5: ERG Group Revenue Breakdown, 2019
  
Source: Company reports and accounts/Mintel

The full push into convenience?
Whilst a growth area of the convenience sector, petrol forecourts, for the most part, do not see the volumes that c-stores in residential and urban areas do. Indeed with the majority of Asda’s forecourts, and indeed Euro Garages, in out-of-town or retail park locations, any expansion in this area, whilst likely driving revenue for the business, will not give Asda the exposure to convenience retailing to rival the likes of Sainsbury’s and Asda.

The announcement of the On The Move format was a significant moment as although still focused on forecourt retailing it was the first Asda banner to be specifically ‘convenience focused' and the fact Asda operates the same pricing structure across both its supermarket and convenience operations would be a major boost should it move further into the sector. 

As we highlight within Mintel’s Convenience Stores: Inc Impact of COVID-19 – UK, June 2020 Report, convenience stores, particularly those in residential areas, have seen a significant boost due to COVID-19. This was in part due to lockdown, but equally due to more common working at home practices and with this likely to be a long-term legacy of COVID-19 we predict that this will give a long term boost to the convenience sector.

Indeed this trend, as we have seen so far in 2020, has drastically reduced vehicle use and in part this has been due to lower levels of commuting. Google Mobility data, see below, backs this up as whilst visits to workplaces in the UK have improved from the low during lockdown, they were still down on average by 30.1% in September.

From online to c-stores one of the legacies of COVID-19 may be grocery shopping coming closer to the home, and this may leave Asda exposed – should it not make the push into standalone convenience. Of course trying to enter this highlight competitive market, where prime locations are hard to come by, is difficult, as Morrisons learned, but we would not be surprised that under its new ownership Asda does not make a bigger play in the convenience market.

FIGURE 6: Google COVID-19 Community Mobility Reports, UK (National), 15 February-27 September 2020
  
Source: Google LLC “Google COVID-19 Community Mobility Reports

Expanding the multi-mission experience
As we highlighted within Mintel’s Supermarkets – UK, November 2019 Report, a key trend within the large-format grocery sector in the past decade has been the creation of a more European style ‘multi-mission’ format among the UK’s largest grocery stores. As basket sizes and volumes have shrunk due to more top-up style behaviours, retailers have needed to find new partners and services to fill space.

COVID-19 may have given a temporary boost to basket sizes, but even if there is a long-term boost to basket sizes due to the pandemic the reality is the ‘multi-mission’ style experience is still critical to modern consumers. Indeed 49% of consumers say the range of non-foods at large grocery stores is a key reason to visit whilst 40% say they visit large grocery stores to use in-store services.

Asda has been one of the leaders in this part stretching back to the Walmart influenced ‘Supercentres.’ Indeed in September 2020 it announced a raft of new partners, most notably with B&Q for in-store concessions.

Whilst the Issa brothers bring experience on the convenience retail side, looking at TDR’s portfolio of investments one thing that is striking is how they have leveraged commonalities across acquisitions to drive success. Stone Gate Pub Company for example was born from an initial 333 pub acquisition into a 4,800 chain taking in pubs, bars and foodservice. The brands may be distinct but the scale the combination of these has given has brought bargaining power and seemingly success where former owners have failed. TDR has similar form and again seemingly success, in the building sector.

It is likely Asda too will both benefit from and be part of this strategy and there are clear opportunities within both new owners operations for synergies to be unlocked. Stone Gate Pub Company for example has significant experience in foodservice that could be leveraged for in-store catering, whilst there is the potential for NKD to be leveraged on the non-food side. As a lost cost operator NKD’s position would suit Asda, although in reality there is probably more opportunity for the likes of George to expand into NKD than in the reverse scenario.

TDR also owns Algeco, a business specialising globally in modular space and storage units. In the UK the business operates through the Elliott brand names, and notably has a strong offering in temporary work spaces. A key trend of COVID-19 will be the need for more such locations, particularly outside of city centres, and larger Asda stores, and car parks, could accommodate such a development – with the added benefit of a potential uptick in store traffic by bringing office work adjacent to the store itself.

What it means
●	Walmart’s exit from the UK grocery sector has been on the cards for a couple of years. It leaves a legacy of modernising Asda and cementing its position with the ‘big four’ grocery multiples and growing one of the UK’s largest clothing brands. The fact its relationship with Asda will continue was an important and crucial detail in the deal, continuing to give the retailer access to the sourcing network that has kept it competitive in the modern grocery sector.
●	The heads of the new ownership Moshin and Zuber Issa bring with them significant experience and business acumen, and notably experience within the grocery sector itself. Their experience within the convenience sector may see Asda push more into this area, whilst overall the move to private ownership may allow the business to become more dynamic and free from scrutiny.
●	TDR have been positioned as more of a silent partner in the deal, but the company too has many complementary businesses under its stewardship. The initial period of ownership will need to be about ensuring a smooth transition, but longer-term there is scope for synergies to be unlocked particularly in the key multi-mission element of modern superstore retailing.