RSS feedsWith 2006 revenues approaching $350bn, a shade under two million employees and 180 million customers spending money with it every week, Wal-Mart is a retail operation without equal. So, when in 1999 it cast a beady eye over Asda, the UK’s second-largest retailer, its then directors would have reacted with mixed emotions. After all, it’s impossible not to respect a lion but would you really want to come face to face with one?
The eventual digestion of Asda gave Wal-Mart a footing in the competitive UK supermarket sector, but it also handed the British company access to the highly successful Wal-Mart formula a formula which has resulted in the American retailer’s global revenues almost tripling since 1999.
So far, that formula is, well, doing okay. While Asda has overtaken Sainsbury’s to tentatively adopt second place, Tesco has shown greater agility, a better strategic vision and far more aggression to secure first place, with 2005 UK revenues about twice that of Asda. But, according to its chief financial officer, Judith McKenna, this is of no great importance. “The aim is not how big we are, the aim is how good we are so that is what we absolutely focus on,” she says.
How Sam Walton, Wal-Mart’s hands-on founder who died in 1992, would react to assertions that size doesn’t matter is unclear. His vision was simple: build ’em big. As it is, not only has Asda fallen far behind Tesco in the UK, it appears that Tesco is also going after Wal-Mart’s home turf, with an audacious expansion into North America already underway.
Nevertheless, McKenna is unruffled. “It’s absolutely not about the size, it’s about the best,” she says. “And it’s about one store at a time. One of the reasons why it has been successful at managing an organisation that’s as big as it is, is because it’s concentrated on being good at every store, as opposed to being the biggest that you can be. The best thing to do is not worry about what anybody else is doing.”
In many ways, this reflects the financial world’s view of Asda since the acquisition. Having de-listed from the London Stock Exchange, the attention of investors, analysts and journalists went elsewhere in effect, Asda fell off the financial radar. But, as McKenna says, “We might have lost a bit of weight and authority with you guys and the City, and we have a job to do to manage that, but the most important people are the customers… You have to be really careful not to be too worried about your public image from a finance perspective.”
Private comparisons
Indeed, the very fact that Asda is no longer a public company offers the company
several advantages over its rivals. If, for example, you were wondering why we
compared Tesco and Asda’s 2005 performance, it’s because by the time we went to
press they were the most-recent available figures. Private companies, as is well
known, are given 10 months to file their accounts with Companies House, meaning
2006 figures will only be made available at the end of October 2007.
Consequently, financial comparison is relatively difficult to carry out by
public companies on their private company competitors.
Also, and perhaps more importantly, private company accounts need have no narrative reporting to go alongside them, removing the requirement for company directors to divulge potentially commercially sensitive, strategic information, such as target markets and predictions for growth, to the competition.
Mckenna remains philosophical. “It’s a double-edged sword,” she says. “As a finance person, I like the fact that we don’t tell anybody anything. However, not being able to talk to the public as much about the things that we’re trying to do and get to analysts… it can be difficult to get your message across.” To combat this, Wal-Mart hosts analyst days in the US to which UK analysts are also invited. And Asda itself holds communication days for UK-based journalists.
So, the Wal-Mart acquisition has resulted in British retail analysts hopping on 747s and crossing the Atlantic to listen to Wal-Mart’s vision. Coming the other way? Onerous regulation and compliance.
“It’s not easy,” says McKenna. “Would you choose to go through Sarbanes-Oxley? No you wouldn’t.” To make sure it was turned into a positive experience for Asda, however, rather than merely an onerous compliance exercise, McKenna and the Asda board used it as an opportunity to “do a clean sweep”.
“It was onerous to do the documentation in a very prescriptive way, but it was a good chance just to double-check everything and make sure that everything was in place and in progress,” she says. Despite this, McKenna insists that Asda is no “more or less” fraud proof than it was before the legislation came into force.
But it has not been a waste of time. “What it does is make sure you’ve got a really good, clean bill of health internally. Sarbanes-Oxley makes sure that, internally, we know that we’re the best that we can be at financial control, everything is documented, we know where the risks are and we’re controlling them effectively,” she says.
From a purely financial perspective, McKenna also had to adopt US Gaap and she says that the finance team was one of those affected most by the acquisition. “In any organisation that’s a subsidiary, finance has one of the closest relationships with the parent of any of the functions and it took us a bit of time to work out exactly how that relationship worked,” she says. “But it’s a very comfortable relationship now and they let us get on with our job.”
As you would expect in an organisation of Wal-Mart’s size, reporting lines can become complex, but she insists that a dotted-line to an international CFO in addition to her traditional line to chief executive Andy Bond presents no issues. “I operate exactly as you’d expect any FD in any UK company to operate,” she says.
Post-Enron legislation and accounting standards are not the only things that have been adopted by Asda from the other side of the Atlantic. Strategy sharing has been going on since before Wal-Mart became involved and, having been at the company for 12 years, McKenna has experienced life before and after the acquisition. “Allan Leighton, who was our chief exec at the time, had a very good relationship with the Wal-Mart people,” she says. “He’d been over several times… So a lot of the culture was already embedded and we were probably the most-like-retailer within all of the UK to Wal-Mart. So it wasn’t that much of a cultural shock.”
She says the biggest change was the sudden access to a market in general merchandise. “We were to massively expand our general merchandise work,” she says.
Trick or treat
It’s an apt time to be writing about expansion into general merchandise, with
Halloween a major event in the US just beginning to take off in the UK.
“Wal-Mart excels at it and we brought a lot of that over and it’s now a big
event,” she says.
However, the expansion is probably more visible through a separate concept of the supermarket Asda Living, a chain of stores that are an attempt to break in to the lucrative home furnishing market and compete with the likes of Next Home and even IKEA.
“One of the things about Asda is that if you backtrack six years, we had two formats that was it,” she says. “We then went through a phase of realising that one of the things we needed to look at was different formats, so we started experimenting… and researching into a number of things; some of which we knew would work, some of which we knew wouldn’t work as well, but it was important we found out what the growth areas could be for the future. What’s come out on top is ASDA Living.”
One of the “experiments” that certainly didn’t work, was Asda Essentials an
attempt to compete with low-budget stores such as Aldi and Lidl. Asda Essent i
als’ strategy was to stock own-brand products a strategy which ultimately
bombed and resulted in the closure of a store. “The great thing is that we
actually suffered very little for it,” insists McKenna. “We took a load of
learning about customer habits, how they shop, what’s important to them, what
they absolutely need in the shop and what they don’t need in a shop. We
relocated all of our colleagues from that store into other stores… and it was
easy enough to clear the stock. I think one of the things is that you’ve got to
be brave and you’ve got to be bold about some of the things that you try, but
don’t do it on so broad a scale that if it’s not quite right you can’t do
something about it.”
With 2005 sales of £14.9bn and earnings of £463m, Asda is performing well
enough. But with Tesco enjoying UK sales of more than £32bn during the same
period it will take many more successful experiments for it to be challenging
the UK’s top supermarket.
That is, of course, if size matters.
Hot property
One of Wal-Mart founder Sam Walton’s traits was to personally fly over US towns
where he was planning on opening a store to look for the most ideal location.
Once he’d recognised a plot situated by a busy intersection, or in between two
heavily populated areas, he would land his plane and buy up the plot of land.
Property was key.
To Judith McKenna, Asda’s CFO, property takes a similarly important position to her role. She says that putting the store development team together with the property team delivers “some great synergies”.
“There is a real benefit in owning your own land and your own property. Apart from anything else, it gives you control over what you want to do with it for the future,” she says. “It’s not necessarily a bad use of capital to have it invested in property.”
