Chapter 9
ASDA Group PLC
9.0
Introduction
The origins of ASDA go back to the period that followed the end of the First World War. In 1920, J. W. Hindell, together with a group of farmers, formed a business partnership. The purpose of the partnership was to develop a wholesaling and retailing structure that, by controlling the distribution, would secure a market for the farmers’ milk and dairy products.
Over the following two decades, the partnership consolidated its activities through internal expansion and acquisitions. When, in 1949, the partnership became a public company, under the name of ‘Associated Dairies and Farm Stores Ltd’, it included 26 farms, three dairies, two bakeries, 42 retail shops and pork butchering facilities. In the following 20 years, the company successfully continued to expand its operations in the food business, mainly in the Yorkshire and Midlands area.
In 1965, Associated Dairies had sales of £13.5 million and was highly profitable. In that year, the group entered the superstore business by acquiring a local food retailer and setting up a new business unit: ASDA Stores. Two large warehouse-like shops with big car parks were used to offer customers cut-price groceries, with limited fresh food and cheap non-food items. Although spartan in look and providing a limited range of goods, superstores offered significantly lower prices and appealed to the working class that constituted the greater part of the population where the superstores were located. The formula was an immediate success. Over the following years, supported by excellent
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results, operations were slowly but steadily expanded through the building of a network of superstores and large supermarkets in the north of England and Scotland.
By 1980, the group had significantly changed the balance of its business activities. The company was still involved in manufacturing milk and dairy products and in the processing and marketing of meat, but the importance of the original business had declined. From a group mainly involved in food manufacturing with some interests in retailing, it became a successful food retailer with some interests in food manufacturing and furniture retailing. The latter resulted from the acquisition, in 1978, of Wades Department Stores (a furniture and carpet retailer) and Allied Retailers [operating Allied Carpets (a chain of carpet retailers), Williams (a furniture retailer) and UKAY (a home furnishing super centres specialist)]. The group had a turnover of £999 million and a pre-tax profit of £49 million, with the superstore business contributing to more than 80% of group turnover and of its profits. ASDA Stores had a market share in the packed grocery market of 8.4% and was the third largest retailer in the industry behind Tesco and Sainsbury. However, it had the highest profitability. The company operated 75 superstores with an average sales area o f 33,350 square feet. Located in edge-of-town sites, ASDA’s stores had large parking facilities and 35 of its stores had petrol stations. Inside, stores had wide aisles and stock was made of branded grocery products. However, a wide range of non-foods products (clothing) was also available. Fresh food, fruit and vegetables and in-store bakeries were introduced in new superstores.
The success of the superstore business was due to many reasons. Although in the 1970s other companies had tested the superstore format, ASDA was the only company in the sector that operated edge-of-town superstores on a large scale. In an economy where
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most retailers operated in city centres, the capital cost of an out-of-city building was significantly cheaper than that for the city centre. This, combined with the existence of clear economies of scale at the store level, gave ASDA a strong position as one of the most profitable large operators in the industry. Furthermore, ASDA’s retail formula was particularly appealing to the consumers of the 1970s, who had benefited from the proliferation of the automobile (that gave them more flexibility in their shopping) yet whose finances had been badly hit by two economic recessions and by high inflation.
Table 9.1 The Associated Dairies Group: Financial and Operational Statistics 1980/81
Group Sales (£; 000; after taxes) 1,188,000
Pre-tax Profit (£; 000) 51,389
Contribution of ASDA Stores to Total
Group's Sales* > 80.0%
Number of Outlets 78
Total Sales Area (sq. ft.) 2,604,000
Average Sales Area per Outlet (sq. ft.) 33,385
Market Position _____ discount
Market Share 8.4%
Own Label Share of Sales (1981) 7.0%
Information Technology Little
Centralised Distribution Z °
1
Source Various Documents
In the late 1970s, notwithstanding strong price competition in the industry, ASDA was regularly shown by market research studies as the company among the major multiple food retailers with the lowest prices across the country. Its prices were, on average, ten percent lower than other main retailers. This was a remarkable achievement, especially when we consider that its operating margins on sales, at around four percent, were among the highest in the industry.
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In 1981, Peter Firmston-Williams, Managing Director of ASDA stores, retired. He was replaced by John Fletcher (previously of Oriel Foods, with an MBA from Harvard Business School). The plan was to continue to open between four and six superstores a year and to expand in the south, particularly in the London area and Home Counties, where the company did not have any stores.