Why Walmart Sold Asda

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\"RRIn an unfortunate lapse of judgement, Mike Coupe was caught on a hot mic crooning the ditty made famous by the musical 42nd Street,” We’re in the money, the sky is sunny, let’s lend it, spend it, send it rolling along,” as he prepared for an interview by the UK’s ITV television network.

Coupe is the CEO of the British supermarket chain Sainsbury’s that had just acquired a controlling interest in Asda from competitor Walmart. He was in the television studio to discuss the deal. And Coupe was in the money too. The value of the Sainsbury’s stock that he owns increased by $750,000 because of the deal.

As hot-mic embarrassments go, Coupe’s little faux pas was far from the most egregious we’ve heard lately, but it did earn him a rebuke from the Unite union, which questioned the basis of the deal that has its members worried about job continuation. The union seemed to be asking if his slip was rooted in pure personal enrichment. Coupe did say later that “I apologize if I have offended anyone,” a sort of non-apology that generally means “if anyone was dumb enough to take umbrage, I regret it.”

Apart from the amusing aspects of the incident, there are some serious business ramifications to consider concerning the Asda deal. Let’s take a look at them.

  • By the numbers, Walmart sold the majority of its interest in Asda, a low-end supermarket chain, to up-market Sainsbury’s for $4.1 billion in cash, plus a 42 percent interest in the Sainsbury’s-Asda combination. Walmart had owned Asda from 20 years.
  • Walmart rarely sells its international holdings to in-market operators, but in this instance, it might have been a useful gambit for all concerned. This end of the UK market is increasingly owned by Lidl and Asda, so why shouldn’t Walmart admit defeat and offload the problem to Sainsbury’s? And, should Sainsbury’s succeed with its newly bulked-up company, Walmart will share some of that success.
  • No doubt Sainsbury’s can capture cost efficiencies, such as headquarters combination, that will give it the breathing space that Walmart couldn’t have similarly captured. Moreover, the Sainsbury’s-Asda company will become the UK’s largest food retailer, taking the title from Tesco.
  • Yet, in the end, Sainsbury’s has done little more than take a bigger stake in a declining market. So maybe the 42nd Street music therapy was in order.

Walmart’s Grand Scheme of Things

The bigger picture is that Walmart can use some extra cash to sponsor its moves from being a mass-market discount chain to a player in the new world of e-commerce. That world is now dominated by Amazon and Walmart is looking to change that. Walmart is already increasing its online retail offer by way of numerous acquisitions, notably that of Jet.com. There have been dozens of others, including Walmart’s potential acquisition of India’s Flipkart and the health insurer Humana. Each of those acquisitions would take Walmart in new directions and give it more firepower against Amazon.

Now, it’s true that to an enterprise the size of Walmart, an extra $4 billion or so harvested from Asda doesn’t make much of a difference, but it certainly shows that Walmart is willing to sweep aside the underproductive businesses it owns on its path to fending off the Amazon threat. Eliminating distractions is always a good strategy.

The Walmart-Amazon battle is destined to do nothing but heat up. And what an interesting battle it is. Amazon can continue with what it’s done for a long time — selling more of everything to everyone with little accountability for profit. Walmart’s work is more difficult. It has to completely reinvent itself by abandoning a lot of its legacy businesses. Conversely, it has a strong foundation in physical stores, which Amazon lacks and seeks to develop. The real winner of the battle could well be the company that best moves to the center — the center being the right balance between all online and all store based.



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