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Analysis

How Walmart’s UK invasion fizzled out

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When Walmart arrived in Britain 21 years ago, local rivals were alarmed by the prospect of going up against the world’s most formidable retailer.

The Arkansas-based juggernaut was at the time opening enough new floorspace each year to occupy the entire store estate of J Sainsbury or Tesco, and its presence threatened to shake up the UK market with the same cut-price efficiency long deployed in its American heartlands.

“It was quite sobering to have the world’s biggest retailer turning up on your lawn,” recalled Terry Leahy, who was then running Tesco, Asda’s larger rival. “They were five times [our] size.”

On the day Walmart’s takeover of Asda was announced in 1999 – trumping a rival offer from Kingfisher – European supermarket stocks shed more than $4bn in market value, noted Leigh Sparks, professor of retail studies at the University of Stirling.

But two decades on, Walmart has failed to realise its early ambitions. While Asda has hardly been a disaster for the US group — it retains a share of about 14.5 per cent of the UK grocery market — it has failed to upstage Tesco and has instead jostled with Sainsbury’s for the number-two position.

Line chart of  Grocery market share (%) showing Asda has failed to make in-roads in the UK

After a lengthy attempt to dispose of the UK business — including a blocked plan to merge Asda with Sainsbury’s — Walmart unveiled a £6.8bn deal on Friday to sell it to private equity group TDR Capital and two Lancashire entrepreneurs, Mohsin and Zuber Issa.

Walmart will retain a minority equity stake of an undisclosed size in the grocer. Judith McKenna, head of Walmart International, said the company would “continue to learn from Asda”, whose new owners plan to keep Roger Burnley as chief executive.

“You have to accept the fact that in some markets you can be more successful with a smaller stake if you have the right partners alongside you,” she added.

Asda seemed like a good fit for Walmart in 1999. Not only did the chain cater to low and middle-income households like its US cousin, it also had a sizeable non-food business, including its George clothing line. While its stores were much smaller than Walmart’s vast US “supercenters”, they were significantly larger than those of UK rivals.

Column chart of Underlying pre-tax profit (£m) showing Profits at Asda

There were also cultural similarities. Asda’s two leading executives, Allan Leighton and Archie Norman, were admirers of Walmart and had before the acquisition copied features such as deploying “greeters” to welcome shoppers. 

With a toehold in Germany, Walmart was expected to use Asda as a springboard for a pan-European assault. It was welcomed with open arms by former UK prime minister Tony Blair’s government, which was fond of talking about “rip-off Britain” and the need to reduce prices.

Over the years, however, Asda has faded in comparison with Walmart’s operations in racier markets, such as China and India. Today the UK chain, which has 630 stores, is a small contributor to the group, generating $29bn in sales in the year to the end of January 2020, compared with Walmart’s group total of $520bn.

The first Asda-Walmart store opened in Bristol in 2000 © Neville Elder/Corbis/Getty

“Walmart’s core model — of blowing the competition out of the water with massive price differential and huge out-of-town stores — never really got delivered,” said one top executive in the grocery sector. “They misunderstood how hard opening big out-of-town shops is in the UK.”

Prof Sparks said he believed Walmart “thought the planning system would open up, so they could expand like they did in the US. That didn’t happen, so they had to buy something instead.”

But a 2003 proposal to acquire Safeway, which would have given Asda more scale and exposure to the south of England, was rejected by competition regulators.

“If that deal had gone through, they would have been more of a significant challenger,” added Prof Sparks. The acquisition of 146 Netto stores in 2010 was seen by many as an expensive consolation.

With a store portfolio tilted towards the north of England and Scotland and a value-conscious customer base, Asda was exposed to the rise of the German discounters, Aldi and Lidl, which lured customers with cut-price essentials and hundreds of new stores.

Sir Terry said Asda “tended to rely on the claim that their prices were the lowest. They became a bit of a one-club golfer and when discounters took that club away they had no special proposition to customers.”

The rise of online shopping added to pressure on Asda’s non-food business, while some analysts said its failure to produce a rival to Tesco Express and Sainsbury’s Local was a strategic error.

“It missed out on a lot of those local, convenience-type markets that other groceries were able to capitalise on,” said Neil Saunders, managing director of retail at the consultancy GlobalData.

He added that Asda had gone through a succession of chief executives. “They were all good operators, credible characters: you couldn’t accuse Asda generally of being badly run.” 

Andy Bond, who ran the company for five years up to 2010, rejected the idea that Walmart was an overbearing owner. “It’s a loosely rather than tightly held confederation of businesses,” he said. “The idea that there was an iron fist in Bentonville [where Walmart is headquartered] is wrong. They wanted strong local management.”

Donald Soderquist, senior vice-chairman of Walmart, centre, with Asda chairman Archie Norman, right, and Asda chief executive Allan Leighton announcing the takeover in 1999 © Robin Nowacki/AP

Walmart took a total of £1.8bn in dividends out of Asda and redeployed some of its best executives elsewhere, although Mr Bond said it never left its subsidiary short of capital or management. “Any suggestion they sucked Asda dry is completely wrong.”

Walmart’s Ms McKenna said shoppers benefited from its two decades in Britain, and not just through lower prices. Expanded ranges in UK retail were “partly the result of Walmart’s entry into the market”, she added.

While Walmart allowed Asda to operate at arm’s length, it used its global scale to achieve better pricing, and imported initiatives such as the “Scan and Go” mobile-checkout technology that was first rolled out at its US warehouse business, Sam’s Club.

Ms McKenna said the rest of Walmart learned from its ownership of Asda, particularly online, where the UK market is considerably more developed than the US.

But the group has long set its sights away from the UK, which Ms McKenna described as “one of the most competitive markets in the world”. Brett Biggs, the group’s chief financial officer, said last year that Brexit uncertainty had also contributed to a “challenging” UK market.

Emerging economies with growing middle classes hold greater appeal. In China, Walmart has about 400 physical stores and a joint venture with JD.com, one of the country’s biggest ecommerce companies. The group has also invested billions of dollars in India, where it controls the online retail powerhouse Flipkart.

“You can only deploy assets in so many places and do it effectively,” said Charlie O’Shea, lead retail analyst at Moody’s.

Executives in Bentonville are also preoccupied with Walmart’s battle for retail supremacy with Amazon in the US, where it generates about three-quarters of sales. The effort requires substantial investment in ecommerce.

For Sir Terry, Walmart’s mixed record with Asda is another reminder that retailers face considerable challenges when they venture overseas.

Walmart pulled out of Germany in 2006 after it struggled to compete with Aldi and Lidl and clashed with trade unions. Tesco encountered transatlantic difficulties of a different kind with its ill-fated Fresh & Easy initiative on the US west coast.

“Prices are generally lower in the US, but the costs of doing business there are also lower,” Sir Terry noted. “It’s often hard to read across the pricing, and economics, from one geography into another.”

Still, Walmart is not abandoning the UK altogether and will keep a seat on Asda’s board. Ms McKenna said the minority interest Walmart will retain in the UK chain is not out of kilter with its other overseas markets, where the group also has alternative ownership structures.

“We are starting to crack the way you do this, which is the flexibility of how you structure ownership in each market,” she explained. “I think that is really the trick with international retailing.”



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Analysis

Iranian TV action thriller delivers warning to Zarif

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It is hardly surprising that Mohammad Javad Zarif, Iran’s foreign minister and nuclear negotiator, is not a fan of Gando, a popular television drama that depicts an incompetent minister who scuppers nuclear talks with world powers by hiring dual nationals who turn out to be spies for MI6.

The series — made by an institute believed to be affiliated to the elite and hardline Revolutionary Guards — “is a lie from the beginning to the end” that “damages foreign policy more than me” by fuelling public mistrust, Zarif said.

By focusing on the nuclear talks, the Guards’ motive goes beyond creating compelling drama, reformist analysts say. Iran is in discussion with western powers about reviving the nuclear deal, a key reformist achievement, and hardliners want to deter the popular foreign minister from declaring his interest in the presidency in what is a crucial election year.

“I’ll be grateful to Gando-makers to let us continue our current job,” Zarif said this month, and commented that he would not run for the presidency.

The possibility of nuclear talks with the US and other powers has complicated an already fraught Iranian political scene ahead of the June election. Many reformists are pinning their hopes on Iran’s top diplomat to reinvigorate the nuclear deal and boost support at the ballot box. Hardliners might prefer to negotiate the deal themselves after the election. The polls are also seen as particularly crucial in case supreme leader Ayatollah Ali Khamenei, 81, dies during the next president’s term.

Pendar Akbari, left, and Ashkan Delavari, right, in a scene from ‘Gando’
Pendar Akbari, left, and Ashkan Delavari, right, in a scene from an episode of ‘Gando’. The series title refers to an Iranian crocodile able to distinguish its friends from its enemies © Bahar Asgari/Shahid Avini Cultural and Artistic Institute via AP

The purpose of Gando, which refers to an Iranian crocodile able to distinguish its friends from its enemies, “is to tell Zarif that should he dare to announce his candidacy, he will be destroyed immediately,” said one reformist analyst. “When the intelligence service of the Guards truly believes in the Gando plot lines, it means even if Zarif decides to defy such warnings, he will not be allowed to run.”

Centrist president Hassan Rouhani is due to step down this year after two terms and it is not yet clear who the presidential candidates will be. Politicians register as late as May and then have to be vetted by the Guardian Council, the hardline constitutional watchdog, which can disqualify nominees. Potential hardline candidates include Mohammad Bagher Ghalibaf, the parliament speaker and a former guards commander; Ebrahim Raisi, the judiciary chief; and Ali Larijani, a former speaker of parliament. On the reformist side, speculation has centred on Es’haq Jahangiri, first vice-president, Hassan Khomeini, a grandson of the founder of the Islamic republic, and Zarif.

A US-educated career diplomat widely respected in the west for his pragmatism, Zarif was instrumental in the historic deal in 2015, under which Iran curbed its nuclear activity in exchange for the lifting of sanctions. But Donald Trump abandoned the accord in 2018, imposed sanctions, including on Zarif, and said he would pursue a new accord to contain Iran’s regional and military policies. The US move emboldened hardliners, confirming to them the untrustworthiness of the US.

Zarif’s background in the US both as a university student and as Iran’s head of mission at the UN — during which he met US politicians including then senator Joe Biden — has long made him a source of suspicion for hardliners.

This wariness of both Zarif and the west is evident to viewers of Gando, as is the heroism of the Revolutionary Guards. Mohammad, the action hero protagonist, warns that western negotiators may sabotage refineries as part of nuclear talks. Mohammad works out of elaborate facilities akin to those in a James Bond film. The fictional foreign minister is advised by a media adviser, the main culprit, “to enter into direct talks with the US and accept the conditions of the leader of the global village”.

Vahid Rahbani in a scene from an episode of ‘Gando’
Vahid Rahbani in a scene from an episode of ‘Gando’. State TV abruptly stopped broadcasting the series that was less than halfway through its 30-episode run © Hassan Hendi/Shahid Avini Cultural and Artistic Institute via AP

The dramatic scenes reflect, in part, the worldview of some of Zarif’s critics. “Reformists, Mr Zarif and his lobby group in Washington [Iranian dual nationals] should be wiped out from Iran’s politics,” said an aide to a senior hardline politician who is a potential presidential candidate. “We have to get rid of this cancerous tumour once for good.”

Gholamali Jafarzadeh, a former conservative member of parliament, said Zarif “is not a good statesman and should not run for president” while “reformists should know that their choices have no chance to be allowed to run”. 

This month, state TV abruptly stopped broadcasting the series that was less than halfway through its 30-episode run. Local media said broadcasts would resume when the presidential race was over. Iran’s centrist president Hassan Rouhani, whose signature achievement is the nuclear deal — alluded to the show on Wednesday and said “people’s money” should not be spent on “fabrication of the truth” and “distortion of facts”.

After three years of sanctions, many voters are disillusioned by the infighting and the prospect of real change, whatever the outcome of the election. “Whether Zarif or a figure more senior than him runs or not, I’m not going to vote,” said Hamid, a 40-year-old engineer. “Let the Guards win the election as they are the ones who are running the country anyway. Why shall I make a fool of myself?” 



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Rising inflation complicates Brazil’s Covid-19 crisis

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After seven months in lockdown, Michele Marques received some unwelcome news when she returned to work: while she was away the prices of almost all the products she uses as a hairdresser had soared.

“A box of gloves rose 200 per cent. Colouring products increased at least 100 per cent,” said the 37-year-old from São Paulo, underlining how costs were rising while her revenue had collapsed. “I had to raise the price of my services, too.”

It is a dynamic that is playing out across Brazil, adding an extra layer of complexity to the country’s coronavirus crisis, which has already claimed the lives of almost 350,000 individuals and pushed hospital services to the brink.

With much of Latin America’s largest economy being shuttered, inflation is surging to its highest level in years, fuelling a silent scourge of hunger among poorer citizens that has run in parallel to the Covid-19 pandemic.

“The high price of staple foods — rice and beans, for example — has led to the disappearance of these items from the table of millions of Brazilians,” said Ana Maria Segall, a researcher at the Brazilian Research Network on Food and Nutritional Sovereignty and Security. In the 12 months to the end of March, the price of rice increased 64 per cent and black beans 51 per cent.

“In Brazil currently food inflation has penalised the very poorest, preventing them from having adequate access to food and in many situations leading to hunger,” she said, adding that rising unemployment and the curtailment of social programmes were also contributing factors.

Volunteers hand out food in São Paulo © Alexandre Schneider/Getty Images

Less than half of Brazil’s population of 212m now has access to adequate food all the time, with 19m people, or 9 per cent of its inhabitants, facing hunger, according to a recent report by Segall’s group.

“I’m doing some odd jobs, but it’s not enough to keep us going,” said Jonathan, a 28-year-old who lost his job in the kitchen of a Chinese restaurant in São Paulo when the pandemic began. He said he now struggles to provide enough food for his three young children and pregnant wife.

On a 12-month basis, inflation in June is expected to surpass 8 per cent, far above earlier estimates. In the 12 months to March, food prices jumped 18.5 per cent, while the price of agricultural commodities in local currency surged 55 per cent and the cost of fuel increased almost 92 per cent.

Line chart of Percentage increase over past 12 months showing The price of rice in Brazil is soaring

The developments pose a fresh challenge to President Jair Bolsonaro, who is already under fire for his handling of the Covid-19 pandemic. Across Brazil’s biggest cities, graffiti has sprung up labelling the populist leader “Bolsocaro” — a portmanteau of his name and the Portuguese word for expensive.

The rising prices are also likely to provide useful ammunition to leftist former president Luiz Inácio Lula da Silva, who returned to the political fray last month and may challenge Bolsonaro in elections next year.

“Bolsonaro is to blame for the increase in food prices, he is to blame for everything. They have to remove this guy,” said Maria Izabel de Jesus, a retiree from São Paulo.

Armando Castelar, a researcher at the Brazilian Institute of Economics, said the government had underestimated inflation both in terms of the numbers and also “how much a concern it should be”.

He attributed the rising prices to the devaluation of the Brazilian currency, triggered in part by the stimulus packages passed by the US government — which helped to bolster the dollar and led to higher Treasury yields — and the brighter economic outlook outside Latin America.

“You have a situation where commodity prices are going up because the global economy is going to grow a lot this year. With the growth in the US, interest rates are going up and the dollar is strengthening. This puts a lot of pressure on the exchange rate in Brazil and emerging markets in general,” he said.

As the spectre of inflation loomed last month, the Brazilian central bank raised its key interest rate by 75 basis points, higher than the half-percentage point many economists had expected. A further rate rise is expected next month.

“The central bank acted correctly, but it cannot stop there. It is important not to be too lenient in dealing with this,” said Castelar.

Silvia Matos, a co-ordinator at the Brazilian Economy Institute, also pointed to Brazil’s weakening currency as a contributing factor to inflation. But she said the slide in the real was triggered by investor concerns over Brazil’s deteriorating public finances.

Following the creation of two separate stimulus packages to mitigate the impact of Covid-19, government debt has risen to about 90 per cent of gross domestic product, a high level for an emerging market economy.

The rollout of the second of these packages began this month, with 45m Brazilians set to receive $50 a month for four months.

Critics said, however, these stipends were not nearly enough to keep people both fed and at home in lockdown.

“It is essential that the emergency aid is of a greater value, so that people do not leave the house but no one also stays at home starving,” said Marcelo Freixo, a federal lawmaker with the leftwing PSOL party.

“We need to reduce the circulation of the disease. Brazil is already experiencing 4,000 deaths per day. We will reach 500,000 total deaths by the middle of the year.”

Matos says that inflation had hit poorer citizens much harder than middle-class and rich Brazilians because a larger portion of their income was dedicated to food, the price of which has increased substantially.

“The only thing that could help right now is to get out of this pandemic,” she said.

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Can CVC pull off a $20bn ‘deal of the century’ at Toshiba?

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Proposed management buyout looks like an improbable win for the Japanese conglomerate’s embattled CEO



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