The retail note - 27 July 2017

• Grocery sales are growing at their fastest rate in four years, according to data from Nielsen and Kantar. In the four weeks to 15 July, year-on-year sales were up 5.1%. Fuelled by ongoing expansion, Aldi and Lidl predictably saw the fastest growth (+15.2% and +17.5% respectively), followed by Iceland (+7.8%). Tesco (+2.8%) was the best performer of the ‘Big Four’. 
• Strong full-year figures from Joules. The lifestyle fashion retailer saw group revenue grow by 19.6% to £157m and underlying profit before tax increase by 34% to £10.1m. E-commerce sales were up by 29.4%, representing 34.8% of total retail sales. Store sales were up by 17.5%, supported by 11 new store openings.
• American Eagle is withdrawing from the UK market. The high-profile US fashion operator opened its three UK stores within the space of a week in November 2014, in Bluewater and the two Westfield centres in London. All three are now closed. A reflection of the huge challenges of international expansion, rather than anything Brexit-related.

Stephen Springham, Head of Retail Research:

Will Asda buy B&M Bargains? Should Asda buy B&M Bargains? Two very different questions, with the latter perhaps easier to answer than the former.

First and foremost, B&M is a phenomenal business. Any questions of it being flash-in the-pan value operator that could only prosper in times of recession and austerity have been firmly laid to rest. In the last financial year (to March 2017), group sales were up 19.4% to £2.43bn, with like-for-like sales up 3.1%. Adjusted pre-tax profit rose 25.6% to £190.1m. The business now operates over 540 stores and is ultimately targeting a network of 950 outlets. Its market cap. is ca. £3.5bn, although press speculation over the week-end pointed to a takeover figure closer to £4.4bn.

But should Asda buy it? To my mind, the business case for doing so is an unconvincing one. The media narrative has construed any potential deal as a direct reaction to Sainsbury’s acquisition of Argos and Tesco’s proposed merger with Booker – by implication, Asda (and Morrison’s) need to do large-scale deals to remain competitive. Buying B&M purely on a keeping-up-with-the Jones’ basis, as the media are suggesting, would be a frankly ludicrous rationale for any deal.

The historic rationale of building scale is also open to question. If the UK grocery retailers have learnt anything from the upheaval of the past few years, it is that big is not necessarily better. Yes, market share has to be defended, but not at the expense of everything else. Focus and agility are far better attributes in modern day retailing than size alone. A takeover deal purely for the sake of scale would be highly tenuous in the current environment.

That said, the two businesses would actually be a good fit on the general merchandise side – both are strong at the value end of the market and lumping the two together would undoubtedly bring synergy. But general merchandise is not where Asda needs to focus its efforts. Asda is by far the worst performer of the Big Four supermarkets (11 consecutive quarters of like-for-like sales declines and market share losses) and the turnaround at Tesco and Morrison’s has further exacerbated its under-performance. Asda’s recovery needs to be food-led and bringing B&M into the fold would not address current shortcomings.

But will Asda buy B&M? Of course, the media speculation has been met with predictable denial on both sides. Price is unlikely to be an issue, with Walmart having extremely deep pockets. And Asda is very close to Walmart’s heart – the UK is Walmart’s second largest market after the US and the head of Walmart International, David Cheesewright is a UK national who cut his teeth at Asda. Furthermore, Walmart’s is no stranger to M&A - its global march across 27 odd countries has been built upon large-scale acquisitions, followed by aggressive organic expansion.

But acquiring B&M would be a still be a departure from Walmart’s acquisition strategy. Most of its acquisitions have been food-led businesses (the exceptions to this being tech start-ups that have been acquired and integrated into its @WalmartLabs division). Where acquired businesses have had non-food operations (eg DIY, furniture), these have generally been regarded as peripheral and have been offloaded. Walmart has very limited history of acquiring general merchandise businesses and when opportunities to buy equivalent businesses in the US (ie various dollar store chains) have arisen, they have passed on them.

To return to the original two questions. Will and should Asda buy B&M Bargains? My view is that they shouldn’t but they might, although I doubt they will.