January 21, 2016

Asda strengthens European buying group EMD

Chris West, VP of Commercial Transformation, Asda (photo: Asda)
Chris West: Asda's Vice President of Commercial Transformation explains the rationale for EMD membership
In advance of this year's referendum on Brexit, the pro-European lobby in the United Kingdom should have pounced on this one for PR purposes.

When the recent floods in the North of England hit Leeds-based grocery multiple Asda Stores Ltd hard, many local suppliers simply couldn't deliver. It was then that Asda's newfound friends at retailer buying alliance European Marketing Distribution (EMD) jumped into the breach and organised alternative sources, representing a triumph of international cooperation.

However, the aim of the new partnership to be signed in the first quarter of this year goes far beyond emergency aid and logistics. Asda boss Andy Clarke clearly sees membership of EMD as a vital strategic measure in his fight to reassert the Every Day Low Price (EDLP) retailer's lost price credentials. But will this move by the UK's third-largest grocer be enough to achieve price parity with the "LADs" (Limited Assortment Discounters), including Aldi and Lidl?

Clarke knows that Asda must regain the price credibility that his own management have inexcusably allowed to be lost to the Germans. "There is currently no growth in the food market, and the rise of the discounters means that we must take radical action to win back our customers," he says in the Sunday Telegraph.

In an astonishing admission of failure for a company whose whole culture has been built around EDLP for the last five decades, Asda states that it let the LADs undercut them by around 20 per cent.

Since the November 2013 launch of a five-year programme to invest £1bn in prices, Asda announced a £300m investment in 2014 followed by a further £300m in 2015. So at their Q3 results in November 2015, Clarke was able to state that the price gap with the LADs had narrowed to just over 10 per cent. The company now intends to pump a further £500m into slashing prices with the aim of reducing the price differential to "only" 5 per cent.

Asda in 2014

Year to: 15th February, 2015
Group revenues: £23.2bn (-0.4%)
Total sales excl. petrol & VAT: +0.5%
Like-for-like sales (excl. petrol, VAT): -1%
Operating profit: £1,013m (+1,9%)
Underlying operating profit: +4.1%
Net cash inflow: £370m
UK store base: 616 outlets, including 32 Supercentres, 332 Superstores, 34 Asda Living stores, 201 Supermarkets, and 15 standalone petrol stations
This would be fine in a world where the German discounters, whose increasing assortments already overlap Asda's by around 20 per cent, were standing still. The only trouble is, however, that they are both recording double-digit growth.

In a research note Mike Dennis at Cantor Fitzgerald Europe estimates that Aldi invested more than 200 basis points in its prices and that sales jumped 30 per cent last year.

The no-frills retailer has also made it plain that it will do "whatever it takes" to retain price leadership. Experience over the last five decades in Germany would give little reason for UK grocers to doubt their word. Meanwhile, Aldi Stores Ltd is set to open at least 60 to 70 stores a year till 2023, whereas Asda has virtually called a halt to expansion and seemingly cannot reassign redundant store space quickly enough.

Join the club

It is clearly in this price context that Britain's third-largest grocer wishes to join EMD with combined annual sales of €178bn. The international alliance, founded in 1989, includes around 500 food retailers with more than 150,000 points of sale in all types of distribution.

EMD Members

Asda, Axfood (S), Casino (F), Dagrofa (DK), ESD Italy, Euromadi Iberica (E), EuromadiPort (P), Markant Austria, Markant Czech Republic, Markant Germany, Markant Slovenia, Markant Syntrade (CH), Superunie (NL),
Tuko Logistics Oy (SF),
Unil/Norges Gruppen (N)
Importantly for Asda, whose own label accounts for around 44 per cent of annual revenues, the 15 members of EMD achieve combined private label sales of around €80bn.

Philippe Gruyters, CEO, EMD (photo: EMD)
Philippe Gruyters: Managing director of EMD
EMD's managing director Philippe Gruyters is obviously pleased to gain a major UK retailer. The 52-year-old Belgian and former Aldi manager is, however, a realist. Initially, only around 2 to 3 per cent of this figure could be combined across the alliance's 60-odd own label projects, he says.

So now Asda will be discussing joint buying with, for instance, Markant member Kaufland, while Kaufland's sister company Lidl bangs away at Asda in the UK. Such, it would seem, are the paradoxes of international retailing these days.

Although retailer alliances seem to be en vogue at the moment, Asda's membership of EMD is a logical move. Intriguingly, it also marks the return of parent company Walmart to continental Europe after a disastrous foray into Germany from 1997 to 2007 cost shareholders billions.

So it will also be interesting to see whether the new alliance remains a purely "local" affair, or whether it could be the harbinger of a return to continental Europe for the Americans. At all events, EMD will provide them with an excellent listening post.

Meanwhile line managers like Chris West, Vice President of Commercial Transformation, will have the task of maximising the advantages of EMD membership for Asda:

"We looked eastwards to Europe"


Chris West, VP of Commercial Transformation, Asda (photo: Asda)
Chris West: Vice President of Commercial Transformation
Mr West, to what extent are Asda's plans for EMD membership motivated by increasing competition from Aldi and Lidl in the UK?

I would like to answer this question more holistically. Membership is about providing our customers with great quality and prices that allow us to compete better not only with Aldi and Lidl but also with Tesco, Morrisons and Sainsbury's. So this is a strategic play that further underpins Asda's heritage as a price leader with a full offer of lines far beyond what the discounters can offer.

Do you have an exact date for EMD membership yet?

No, the lawyers are still sorting things out, like the share structure, but it will be soon.

Presumably Asda will be taking the 3.5 per cent stake of departing member Musgrave?

Yes, it will be something along those lines.

We hear that you approached EMD first and not the other way around?

Correct.

Why were you so keen?

We have been looking at our business because we were not happy with our promotional performance. EMD membership enables us to support our new priorities, and private label is one of them.

Why couldn't you have joined a UK buying group?

It wasn't feasible due to the commercial regulations regarding market share. The beauty of EMD is that all operations are country-specific, so they don't overlap.

Why does the UK's third-largest grocer and a subsidiary of the world's largest retailer need to join any buying group at all?
In food sourcing and specifically private label buying we don't have a natural partner. Most of our Walmart family members are on the other side of the Atlantic Ocean or spread across the globe. So the economics and logistics of food sourcing are not feasible. We therefore looked eastwards to Europe.

Asda in-store scene emphasising price (photo: Asda)
Omnipresent: No customer can walk through an Asda store and not get the price message
What other advantages will EMD membership bring?

EMD membership will give us a deeper understanding of the European supplier base. Continental manufacturers have been conditioned for quite some time to the intense retail competition created by the hard discounters, which will give us some new perspectives and ideas.

Won't higher transport costs from the continent cancel out any lower buying prices you may be able to achieve?

Obviously we take things on a case-by-case basis and wouldn't pursue marginal items. But there are other categories that I can't name, where there is a clear benefit even after higher logistics costs.

Will the new agreement be skewed towards food or non-food?

We will prioritise food first.

What product categories are involved?

Your question is commercially sensitive. I can only say that we are currently reviewing all our ranges and have some reorganisation in the ambient area. Obviously we will start where we can make the most impact on our customers in terms of price and private label identification.

Will you be mainly negotiating for your "Extra Special" premium own label line?

No, we are looking across all our tiers of private label, which make up around 44 per cent of our annual sales. These also include our "Asda" standard mid-range and our "Smart Price" value line.

Many suppliers are not keen on cooperating with European buying groups. They claim you only demand better terms & conditions with little or no quid pro quo. Presumably you wouldn't agree?

Asda Rollback price advertising (photo: Asda)
Asda's Rollback: Yet another way to hammer home prices
As a large retailer we obviously offer substantial volumes through the many millions of customers who shop with us every week. So we offer growth. Many of our UK suppliers will gain greater access to the European market through EMD. In fact we have some phenomenal UK suppliers whom we feel we can champion there.

Your sourcing arm IPL is the largest importer of fresh produce into the UK and the second-largest food company after 2 Sisters. Will you be distributing IPL products through EMD's 14 other members?

International Procurement & Logistics Ltd (IPL) is essentially about the food processing of cold sliced meats and the packaging of fresh produce. These activities are obviously complimentary to our sourcing, but EMD doesn't focus on fresh food. How IPL could fit into the EMD network is something that could be explored further down the road, but we do not have any clear conclusions as yet.

One last question, can Asda's membership of EMD be regarded as a precursor to Walmart returning to continental Europe?

You should address this strategic question to our CEO Andy Clarke.


Related article in German: By Mike Dawson in Lebensmittel Zeitung (LZ), no. 3, 22.01.2015. Readers are also referred to an article on EMD in LZnet as well as to an interview with Philippe Gruyters by Gerd Hanke in LZ, no. 2, 15.01.2015


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