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Judith McKenna, Asda CFO

Judith McKenna

With 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

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

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

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

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.”

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