Norman’s Conquest

Asda’s Archie Norman has increased this year’s pre-tax profits by an anticipated 20 per cent to 300m. In his fight against high fixed prices on non-foods, he would have us believe he is a people’s champion. But he could be alienating suppliers

The working men and women of middle England may rejoice. Their self-proclaimed champion, Asda chief executive Archie Norman, is about to strike a further blow on their behalf.

The supermarket chain is embarking on a programme of initiatives which will create marketing and advertising support for clothing, music and video, books, medicines and personal care products. These non-food sectors are crucial to Asda – they represent a larger share of turnover than for any other supermarket chain – and Asda is keen to sell more of them. It is also expected to place a greater emphasis on its own-label Integra detergent range through television advertising later in the year, and is close to completing negotiations to launch a co-branded loyalty card with Midland Bank

These moves form the background to understanding Norman’s current war with the drugs industry. Asda unilaterally cut the price of 82 branded vitamins, minerals and supplements last October. It was forced to reverse its decision, but only after the Office of Fair Trading set up an investigation into the Resale Price Maintenance agreement which Asda alleges artificially inflates the price of standard drugs.

The war was revived two weeks ago when, again acting unilaterally, Asda cut the price of Anadin Paracetamol. Once more it had to retreat, but only after launching its own range of 33 vitamins and basic medicines. It also de-listed Anadin Paracetamol and has put other manufacturers on 30 days notice of its intention to do the same to them unless they cut prices.

On the surface Asda would appear to have struck a blow for consumers. In reality, the truth is less grand. Anadin Paracetamol is a spin-off from the main Anadin brand with annual estimated sales of just 80,000 through Asda stores. By contrast, the main Anadin brand, which has not been de-listed, is estimated to have sales of 1.75m.

Asda also campaigned against, and claims the credit for bringing about the demise of, the Net Book Agreement, which fixed prices on books in order to preserve profit margins for small book retailers. Woolworths and Dillons were heavily involved, but it was Asda that won most of the acclaim.

The same is true of the attack on the RPM which Asda claims is imposing a “300m health tax” on consumers. It has won the sort of universal newspaper acclaim that Norman was seeking when he took on the drugs companies, and gave the perfect launch platform for Asda’s own-label healthcare range.

Some cynics believe all this is designed to give Norman a platform for his political ambitions. Sources suggest he has been offered a safe Tory seat – whatever that may be – at the next General Election. Allegedly, Norman is debating whether he wants to take it this time around or wait for the election after next – when the Tories may have more chance of winning. He has been linked with the now occupied Harrogate and Vale of York seats.

Either way, Norman is a populist. Asda’s overtly patriotic promotional campaign backing British beef is said to have won him a letter of thanks from John Major and added to his political leverage.

Further good news to bolster Norman’s position will come tomorrow (Thursday) when Asda’s full year results are revealed. The City is expecting the recovery programme he introduced when he joined five years ago to produce another annual profit increase – estimates are around 300m pre-tax, which represents a 20 per cent increase on last year’s 246m. Since his arrival, the share price has risen 500 per cent to a year high of 122p.

Observers say Asda is looking at high-margin product areas where it can force prices down and make a song and dance about it. Better still are areas where there are regulatory barriers or price-fixing systems in operation.

Products like compact discs, where the price of top 20 titles are often over 15, could be ripe for the Asda treatment. A 1994 Monopolies & Mergers Commission investigation cleared record companies and music retailers of ripping off pop pickers with high-priced CDs, despite the fact you can buy them much cheaper in other countries. The image of greedy music business fat cats shafting the music-buying public is a potent one, and one that may well appeal to Norman’s crusading spirit.

“Non-food areas have always been important to us, and we are keen to expand these,” says Gwyn Burr, Asda marketing director. “Our stores are bigger than our rivals, and we want non-foods as a point of difference. It is an important part of our offer.

“Our approach is: what are the value areas for our customers, rather than thinking about what we can campaign against next. There aren’t other areas like RPM. CDs are not on our agenda at the moment.”

While edible groceries, especially fresh and chilled products, get customers through the supermarket door, it is the non-food items that make the largest margins.

Food has been an area of intense price competition since the German discounters entered the UK market in the early Nineties, so there is not much room for price cutting there. But there are still a few areas left where prices are kept artificially high through restrictive agreements.

Asda has a higher proportion of non-food sales than other supermarkets – for example, it gets five per cent of its turnover from clothes, compared with only one per cent at Tesco.

While household and leisure products account for 12 per cent of Asda turnover, its total of 17 per cent of sales from non-foods outstrips all its rivals. Just ten per cent of Tesco turnover comes from non-food categories. Analysts believe Asda could build non-food sales to over 20 per cent of turnover, and that appears to be an internal target.

Ironically Norman is rediscovering the joys of the non-food sector. When he took over at the chain in 1991 – when profits stood at 168.3m – he decided that Asda had gone too far on non-food items, and cut back on them. Walking into an old-style Asda outlet, the first area you entered was clothing and household products, with food coming later. Norman turned the store plan on its head, putting fresh food back by the entrance and a reduced non-food area at the back end of the store. The “Renewal” store format has been successful in getting the customers back to Asda.

He also stamped on pretensions of converting Asda into a northern Marks & Spencer, restored the famous “patting the pocket” advertising and turned price into the ultimate Asda positioning.

In recent months City analysts have started to question where further growth at Asda can come from. That same thought has evidently already occurred to Norman.

Analyst Bill Myers of stockbroker Wm de Broe says: “Asda is inventing the wheel again – they went too far on non-foods and Archie backtracked. Most food retailers can sell non-food lines as long as they are related to food shopping.”

Myers believes there is a price limit of about 10 on non-food items at supermarkets, which means socks, jumpers and hairdryers can be sold.

But there is a danger in getting too heavily involved in clothing – fashion is notoriously fickle, and few supermarkets have been successful in pushing into clothes. Sainsbury’s recently scaled down its plans to introduce clothing to all its stores.

Norman has bludgeoned his way into the public eye with little regard for the effects on other players. On OTC drugs he is accused of risking the nation’s health – if RPM is axed, thousands of small pharmacies could be forced out of business, says

Whitehall Laboratories, which owns the Anadin brand.

He faces similar criticism on the Net Book Agreement: small booksellers will be forced to close, so chains like Asda can sell thousands of copies of Jeffrey Archer pot-boilers.

The strategy has been to choose areas that are of little importance to Asda, but of great importance to its rivals.

Some analysts question whether Norman is taking the strategy too far. In his tussle with the drug companies he is threatening to de-list everything from the main Anadin brand to Lemsip and Panadol. If the strategy is expanded to other sectors, Norman risks alienating suppliers.

Henderson Crosthwaite analyst David Stoddard says: “This is the thin edge of a dangerous wedge. Norman has decided that his customers cannot buy Anadin Paracetamol from Asda stores. Will he decide next that Kellogg’s cornflakes are too expensive?”

Stoddard says Asda could fall foul of the same kind of arrogance that was a feature of Sainsbury’s in the Eighties. It dictated to its customers what they could and what they could not buy. The chain emphasised its own-label products to such an extent, that consumers started drifting away in search of big brands. Sainsbury’s had to reverse the trend by heavily advertising the brands over own-label lines.

It was the same arrogance which damaged relations between some of the supermarket chains and brand owners two years ago over the copycat issue. Now it may envelop Asda.

The packaging of the Asda own-label range of remedies is blatantly copy-catting the branded drugs they are meant to replace – so blatant that it would embarrass some of the retailers who have previously fallen foul of trade mark law.

The brands invest in research to develop the products, which they say justifies high margins. The supermarkets then copy the brands without paying for expensive research and development.

Asda is committed to building its level of own-label products, from the current 35 per cent to 40 per cent of turnover, to provide greater margins and keep prices down.

But after Norman’s complaints on the margins made by the manufacturers of OTC drugs, Asda refuses to reveal the margin it is making on its own-label versions of the drugs.

Norman has presented himself as champion of the consumer, bravely crusading against restrictive practices, including fighting for women’s rights by campaigning for an end to VAT on sanitary products.

But the supermarket chief, described by colleagues as manic, claustrophobic and hyper-active, has a separate – if parallel – agenda.

It is not just Asda’s customers Norman is trying to woo. His ambition to stand for Parliament as a Conservative MP is another factor driving his consumer crusade. One close associate says: “He will not be at Asda in 12 months time. He has been offered a safe Tory seat and will fight for it at the next election.” According to this scenario, Asda deputy chief executive Allan Leighton will then replace Norman.

At 42, the time is right for Norman to start thinking about Westminster. The close associate says the plan is to get in this time around, build his name on the back benches, and enter the Cabinet when the Tories are re-elected after a one-term Labour administration. But such a Byzantine strategy could be beyond even Norman.

Another observer doubts he wants to enter Parliament this time around. “He doesn’t want to sit on the opposition benches for five years, as the Tories will probably lose the next election.”

But the work Norman has done at Asda is fine experience for a political career. If he were as successful at turning round the UK’s fortunes as he has been at transforming Asda, the working men and women of middle England might have something real to rejoice about.

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