Asda turns its fire on staff and frills in bid to fight off discounters

This year, Asda is promising shoppers their “Best. Christmas. Ever” with a festive advert set in a Willy Wonka-inspired factory.

The ad is billed as a “love letter to our customers and products”, featuring tiny Asda workers assembling party canapés and a reindeer-powered food mixer stirring its Christmas puddings. But many Asda staff will be spending the period worrying about the what the retailer’s latest round of cost cutting will mean for them in the new year.

The Guardian revealed last week that more than 800 senior Asda shopfloor workers were facing a pay cut or redundancy in the new year as the UK’s third-largest supermarket chain grapples with the existential threat posed by the rise of the German discounters Aldi and Lidl. Thousands more Asda employees risk having their working hours reduced in 2018 as the retailer adopts a no-frills approach to stacking and tidying shelves.

In a handout given to staff, Asda bosses spelled out the company’s predicament in stark terms: “A proposition based on being the cheapest of the big four [supermarkets] is no longer a viable business model. We need to look at ways to reduce our operating costs to close the price gap with the discounters.”

Aldi and Lidl opened their first UK stores in the early 1990s, but it took the 2008 financial crisis for them to become serious players in the UK food market, as soaring food price inflation encouraged the middle classes to darken their doors for the first time.

Now Aldi and Lidl account for £1 in every £8 spent in UK supermarkets. This Christmas, two-thirds of shoppers will pick up some of their holiday treats at a discounter, thanks to positive write-ups in the food press, with Good Housekeeping magazine, for example, giving Aldi its Christmas pudding gong this year.

Asda, whose US parent Walmart is the world’s largest company by sales, is far from bust, yet its battle with the discounters contributed to a near 20% drop in pre-tax profits to £657.2m last year. But the document given to staff warned that about half of its 153 smallest supermarkets are currently loss-making and it needs to fashion new ways of working to “ensure the longevity of the format”.

The management-speak points to the need to improve staff productivity at a time when inflation and higher business running costs are eroding profits. The squeeze has forced the big four supermarkets – Tesco, Sainsbury’s, Asda and Morrisons – to react, carving out billions of pounds in cost-savings from their stores, warehouses and head offices.

Tesco banked operating profits of £1.28bn in the last financial year, down from £4bn in its heyday under Sir Terry Leahy. Profits are also down at Sainsbury’s while Morrisons, under David Potts, is busy climbing out of the hole it dug for itself.

In October, Asda announced that its newish chief executive, Sean Clarke, would be replaced by his deputy, Roger Burnley, in January. Clarke, a Walmart troubleshooter, was parachuted into the role last summer and the most recent sales figures show his turnaround, focused on price cuts and fewer gaps on shelves, is paying off as a three-year sales slump ends.

The latest item in Clarke and Burnley’s turnaround involves getting rid of 842 section-leader jobs, whose hourly pay rate is higher. If the plan is pushed through the jobs will be downgraded, with attempts made to redeploy staff who are potentially at risk of redundancy.

Shore Capital analyst Clive Black said Asda had been quick to identify the threat posed by fast-growing discounters but that Walmart had been “greedy”, demanding chunky dividends and starving its UK subsidiary of the money needed to invest in its more than 600 supermarkets so it could fight back.

“There has been a failure of investment and management across the board,” said Black.

“The big supermarket chains became flabby, self-serving corporations. They committed the cardinal sin of losing touch with their customers.”

Aldi’s UK boss Matthew Barnes recently signalled a programme of aggressive expansion, suggesting the chain could nearly double in size to 1,300 stores by 2022. Lidl, meanwhile, has secured sites to add between 50 and 60 shops a year for the next two years, boosting the chain’s UK presence to around 800 stores.

But the discounters cannot escape the problems that have beset their bigger rivals indefinitely. The German chains, once famous for their simplicity and tiny product ranges, have altered their winning formula to succeed in the UK.

In particular, they have replaced canned vegetables and bratwurst with bountiful displays of fresh food and meat, making stores more complex and expensive to run.

“I wouldn’t be surprised if we have reached the zenith of the discounter opening programmes in the UK,” said Black. “They may by privately owned business with deep pockets, but they are not irrational and [divorced] from the laws of economics.”