It should be an axiom for mature businesses that they really have only two choices if they wish to deliver earnings growth – they can consolidate or they can diversify. Rationalisation is too often seen as a third option, but tackling the cost base is only a short-term earnings palliative and one that should, in any event, have been undertaken as a matter of course by prudent managements.
Superstore chain Asda, I note, has looked at the consolidation route in the notoriously mature grocery sector, with Safeway last year, and beyond the grocery sector with its overtures to Kingfisher this year, but nothing came of either play. Now, it appears to be covering the possibility that retail consolidation is not to be had for the time being and is pursuing growth through diversification with a chain of drive-through (or is the generic term now “drive-thru”?) restaurants tacked onto the sides of its stores.
The move is in the finest tradition of the superstores’ diversification into logical value added services – witness the initiatives from Tesco and Sainsbury in financial services and the development of petrol retailing in superstore car parks. I have argued before that retail consolidation must take the grocery majors in due course into sectors such as white goods.
But one step at a time. And the development of services – whether financial or motor-fuel – are likely to precede radical departures in product lines, since the return on capital invested is more attractive. Asda’s fast-food outlets are an excellent example of this kind of development. They will not only generate extra revenues on the back of a seemingly endless consumer appetite for handy, pre-prepared snacks (about 35 per cent of household food budgets are spent on food prepared outside the home), but will also serve as an advertisement for its own-label delicatessen products, such as pizzas and curries.
Asda is spending about 30m on adding around 60 restaurants to its 217 stores this year. They will be about 7,000 sq ft and seat some 200 at capacity, so these are not small units. But there are economies of scale to consider – Asda is said to have a target of at least 16 per cent for its return on investment.
A key strategic consideration here is that, along with innovations such as its George range of clothing, Asda is aiming to become a “destination shop”. I take this to mean that shoppers are being invited to consider the concept of visiting Asda, rather than simply doing the grocery run. This is one short step from someone starting to talk of the “Asda Experience”, but no matter – bullshit aside, the motives must be sound if the underlying business case is good.
And the precedents do appear to support the move. There is a growing trend in the States for feeding shoppers in superstores, rather than simply supplying them with food. Less well noticed by trend-watchers is that this has been occurring in France for some time and that in a nation altogether more proud of home-preparation than ours own.
My mother-in-law is Italian by birth and fiercely food-conscious; on a recent shopping trip to Calais, she ate in one superstore restaurant, declared the food disgusting, but noticed a more than brisk trade. If you can do that to an Italian in France, you’ll be able to shovel anything at the Brits and they’ll come back for more (though I’m sure Asda has higher standards than that).
But where I think Asda has a real opportunity is not so much in the immediate added margins it can make – important as those are in the market-share battles between the grocery majors – but in its potential to play a lead role in the future of the UK food industry.
British food companies are facing the same consolidation/diversification conundrum as any mature industry. Most, like Dalgety, have gone for a degree of rationalisation.
Other, such as Albert Fisher, still have some fat that could and should be shed. But all, including Hillsdown and Booker, face the added pressure of a low-inflation environment which can be exploited by major retailers, such as Asda.
The clear strategy must be to consolidate and rationalise the joint portfolio of products. But that’s not always easy when there are several ranges of products being produced for a variety of rival retailers. So imaginative strategies are called for – Unigate recently exhibited such imagination when it ran its slide-rule over Hillsdown.
But imagination within the UK food industry can only serve so far. There is a responsibility to be borne by the big retailers. A major part of the problem in prospect is that it is smaller and niche food producers which will fail to stand the pressure, rather than those, such as Cadbury Schweppes, which have the marketing clout to defend their brands. A limited number of strong, consolidated players dominating the food industry cannot be in the long-term best interests of the retail chains.
I have no idea from which major manufacturers Asda procures its own-label produce. But if it’s not prepared to extend itself into manufacturing as it develops its food retailing interests, it could be storing up problems for the future.