Has Asda lost the plot? In his first blog here, the team’s new credit analyst Joe Macland reflects on Asda’s pesky balance sheet and what we can learn from it.
Last month Asda’s chairman openly admitted that the chain had “slightly lost the plot”. For context, Asda is currently grappling with a nearly 5.5% decline in sales volume and a 1.1% drop in market share so far this year. Meanwhile, its competitors are experiencing an average of 2.3% growth in volume and have captured incremental but crucial market share.
Once a strong number 2 player in the UK grocery sector, the Leeds-based supermarket chain was known for its emphasis on affordability. However, as the grocery industry has evolved, Asda has struggled to keep pace. Aldi and Lidl have eaten a large part of its lunch at the lower price points and the market is being more defined by innovation, technology and ever-shifting consumer budgets.
In today’s fiercely competitive grocery market, the online shopping experience and loyalty programs have become essential tools for winning over customers. Tesco, for instance, has set an industry standard with its Clubcard program. By scanning their Clubcard at checkout, Tesco customers accumulate points and gain access to personalised discounts tailored to their shopping habits. This approach not only incentivizes loyalty but also offers tangible savings that resonate with consumers facing elevated living costs.
Asda’s commitment to its “everyday low prices” model, once a cornerstone of its brand, now appears outdated in a market that increasingly values rewards and a flexible shopping experience.
Further complicating Asda’s position has been the rapid rise of discount retailers like Aldi and Lidl. These German chains have captured a substantial share of the UK grocery market by offering a range of private-label products at exceptionally low prices. Asda finds itself caught in what some might call “price purgatory”—stuck between the relatively more premium offerings of traditional supermarkets like Sainsbury’s and the ultra-low prices of discounters. Unable to compete on either end of the price spectrum, Asda’s market share has eroded.
Alongside these issues, a new layer of uncertainty for Asda stems from recent changes in the UK Budget, which introduced new financial pressures on grocers. With close to 150,000 full and part-time employees, these changes are expected to impact Asda significantly. Asda has projected a £100 million increase in costs—a considerable figure that will strain the company’s ability to invest in the business without having to tap the debt market once again.
With debt maturities on the horizon and the company seemingly burning through cash to invest in upgrading key technology, it doesn’t have much room to manoeuvre. Asda may struggle to ensure it has sufficient cash to cover its increased capital expenditure on top of its debt interest expenses. In addition, Asda primarily leases its store spaces, limiting its ability to lower debt through asset sales.
All of this without the company even having a permanent CEO (and they haven’t for the last three years either!). The latest update is that the search may conclude in 2025, and they have recently announced a change in chairperson which may alter plans again.
Where can Asda go from here?
Without a solid plan to revitalize its stores as shopping destinations and enhance its convenience offerings through its petrol forecourt locations, Asda’s financial health appears to be on a downward trajectory. The recent UK Budget changes may only intensify these pressures, further straining the company’s credit metrics and underscoring the urgent need for a strategic turnaround.
Final thoughts: A roadmap for the future
Asda’s decline isn’t due to a lack of potential but rather a failure to keep up with the evolving market. In an industry crowded with both high-end players and discount giants, Asda must find a way to bridge the gap between affordability and innovation.
Embracing change may be the only way forward, but the company’s balance sheet makes it very difficult to make the deep investments that they need – but then again, can they afford not to?
We currently do not own any Asda bonds, but if indicators that the business is achieving a successful turnaround present themselves, we will revisit the investment thesis.
Joe Macland, Credit Analyst
