Allan Leighton, the executive chair of Asda, has issued a stark warning that food prices are set to rise inevitably due to the ongoing conflict in the Middle East. He has called on ministers to "stand up and start doing stuff" to support farmers and reduce fuel costs, as the supermarket chain's full-year profits plummeted by a third to £764 million.
Pressure on Farmers and Inflation Concerns
Leighton highlighted that farmers are facing significant pressure from soaring costs of fertiliser, energy, and fuel. Despite this, Asda has so far received only a trickle of requests for cost price increases from suppliers, rather than an avalanche. However, he emphasised that this situation is volatile and varies across different commodities, predicting it will lead to inflation in the food sector.
Fuel Shortages and Government Duties
The Asda boss also cautioned about "temporary shortages" at petrol stations, as supplies are squeezed by the Middle East conflict. With the RAC reporting that the average price of unleaded petrol in the UK has risen to 150p per litre, Leighton accused the government of benefiting from £3 billion in fuel duty income. He urged authorities to ease these duties or provide support to farmers on energy and other costs, suggesting that tax from fuel duty should be redistributed to aid agricultural producers.
Consumer Confidence and Broader Retail Impact
Leighton noted that consumer confidence, measured weekly through surveys, is "clearly going down" as a result of the conflict. His comments align with warnings from other retail leaders, such as Simon Wolfson of Next, who suggested clothing prices could rise by 4% to 10% if the conflict extends into autumn, and Daniel Ervér of H&M, who highlighted potential impacts on consumer spending and inflation.
Asda's Financial Struggles and Turnaround Efforts
Revealing underlying profits at Asda dived by a third last year, with non-fuel sales sliding 3.3% to £21 billion, Leighton acknowledged the chain's challenges. Despite price cuts and store refurbishments, sales have declined. However, Asda saw its first month of underlying sales growth in stores in nearly two years in March, after resolving IT issues linked to its transition from Walmart services.
Leighton admitted that online grocery sales continue to fall due to a "clunky" website but expressed optimism about improvements within the next three to four months. He stated that Asda is "edging forwards" and expects to return to profit "soon," with a full leadership team now in place and plans to select a chief executive internally.
Debt and Competitive Landscape
Asda, the UK's third-largest grocery chain with 579 supermarkets, 517 Express convenience stores, and 29 Asda Living outlets, is on track to be overtaken by rival Aldi. The retailer has been grappling with debts and IT problems since a £6.8 billion leveraged takeover in 2020 by the Issa brothers and TDR Capital. Net debt has fallen by £500 million to £3.1 billion, with £1.3 billion in cash providing "great optionality," according to Leighton.
Analyst and Government Response
Retail analyst Clive Black of Shore Capital welcomed Asda's return to sales growth, describing it as "a very welcome change" and predicting the chain will be a more stable player in the competitive sector. In response to Leighton's comments, a government spokesperson outlined measures including £150 off energy bills, a fuel duty cut frozen until September, and targeted support for heating oil costs, while monitoring impacts on farmers and working to reduce food prices.
