ALEX BRUMMER: Buyout grocers crushed by debt anvil

Of all the private equity deals of recent years, the most ill-timed were those done for supermarket groups Asda and Morrisons during the pandemic.

Ambition in both cases was high, but the deals left both grocers weighed down with a monstrous amount of debt and unable to compete with rivals.

Predictably, Tesco with its vast buying power and ability to offer lower prices has raced away since the pandemic and now has 28.3 per cent of the grocery market. It continues to gain share at a rapid pace.

The secretive, German-owned interlopers Aldi and Lidl have European-wide buying power across a narrower range of goods and an own-brand model. They have become price setters at a time of food inflation.

Sainsbury’s, with a market share at 15.1 per cent, intelligently chose to invest in price matching on a core range of goods with Aldi. It is an investment which has paid off. The most recent data from market research group Kantar show the scale of the challenge for private equity-controlled Asda and Morrisons.

The former, now under the stewardship of veteran Allan Leighton, is struggling with year-on-year sales down 7 per cent. Morrisons, on paper at least, looks to be doing better with sales up 1 per cent.

Unable to compete: Of all the private equity deals of recent years, the most ill-timed were those done for supermarket groups Asda and Morrisons during the pandemic

It is reckoned, however, that this might be a case of the hare and the tortoise.

Morrisons, led by enthusiastic Lebanese-born chief executive Rami Baitieh, looks to be doing better. A series of asset sales, including its petrol forecourts, means it has brought down debt levels from £8.5billion, when it was bought by Clayton, Dubilier & Rice in 2021, to £3.8billion.

The difficulty is that its idiosyncratic ‘farm to fork’ model of food retail means it has a higher cost base than competitors.

In addition, its famous ‘marketplace’ style counters, selling everything from bread to fish, are more expensive to operate with greater wastage and staff costs than shelf to consumer.

Rivals estimate that baskets can be up to 7 per cent more expensive. At a time when price is everything, with Aldi going great guns, Morrisons’ much admired model may condemn it to the slow lane over time.

In contrast Asda, the tortoise with declining sales, is in a much better position. A smart deal by private equity group TDR saw it acquire the 22.5 per cent stake owned by the Issa Brothers at what industry sources suggest was a bargain basement price, estimated in June 2024 at £500m. As well as lower legacy interest rates Asda’s stores are endowed with in-store concessions including pharmacies, optician counters, Greggs, Music Magpie and much else, giving it a marketing edge over competitors.

It is also on a convenience store opening spree and has part ownership of EG fuel forecourts.

It doesn’t hurt that the group has a cornerstone investor in mega-retailer Walmart which retains a 10 per cent stake.

The bidding wars for Asda and Morrisons, which in hindsight drove the acquisition cost and debt level up, were in retrospect a dreadful mistake.

Private equity firms boast that away from the glare of scrutiny surrounding listed companies, they can make tough decisions. They reckoned without a fast-changing post-pandemic and Ukraine war market which would see low prices, driven by Aldi and Lidl, become a dominant theme.

Tesco and Sainsbury’s rapidly adjusted. The debt anvil crushed the ambitions of Morrisons and Asda.