When Walmart CEO Doug McMillon in October discussed the possibility of divesting noncore assets as a means of shaping the company for future growth and furthering its U.S. strength, few would have guessed he had Asda in mind.
Walmart’s U.K.-based chain, after all, had been instrumental in providing the foundation for Walmart’s current momentum in the U.S. It has brought forth innovations such as click-and-collect, which is now driving Walmart’s online grocery growth and winning valuable customers; a system of in-store Training Academies focused on improving service, worker engagement and retention; and a best-practices mindset known as “One Best Way” aiding efficiency across the stores.
These initiatives, and the people who led them—such as former Walmart U.S. COO Judith McKenna, Online Grocery VP Kieran Shanahan and EVP of Central Operations Mark Ibbotson—all cut their teeth at Asda. McKenna was promoted to international CEO earlier this year.
Walmart’s English unit was arguably just as valuable to its U.S. operations for the things it didn’t bring to it, but only demonstrated—namely, the danger of competing on price alone amid competition from hard discounters. Aldi and Lidl ravaged all U.K. grocers, but none more so than Asda, which had the most equity as a price operator and little to fall back on when they invaded. That’s one reason that Walmart is now putting such an emphasis on store environments and service, seemingly reaching for a more attractive demographic, in the U.S.—though that’s not to say it's giving up on price either.
Asda most recently had seen its performance stabilize, so it took some by surprise that Walmart would suddenly pack up and sell. But that illustrates another bit of thinking ahead and another few examples in the culture of creative deal-making taking over retail.
Seen in context with other moves recently made or contemplated—the divestiture of the Mexican subsidiary Suburbia, the $16 billion investment in the India-based ecommerce retailer Flipkart, and speculation that Walmart could wind down its presence in places such as Japan and Brazil—Walmart is shifting global priorities, putting international resources toward growing markets and future bets on e-commerce, and paying for it in part by cashing in the far-flung and physical asset-based units it acquired over the last 20 years.
“We like the active management of the portfolio, which should allow Walmart to focus its resources on higher returning markets,” Daniel Binder, an equity analyst for Jefferies, said in a recent note to clients. “By way of example, in June 2016, Walmart sold assets in Yihaodian, its Chinese e-commerce business, to JD.com and announced a strategic alliance with JD, which enhanced its competitive position. In early 2018, Walmart formed a strategic alliance with Japanese internet company Rakuten, which includes offering an online grocery delivery service in Japan, and Walmart selling Rakuten e-books, audiobooks and e-readers in its U.S. stores and website. This followed Walmart closing about 8% of its Japanese retail store base in 2014.”
Barclays analyst Karen Short speculated that Walmart International’s so-called “diversified portfolio markets” (Brazil, Africa, Argentina, Chile, U.K. and Japan) had become a euphemism for its “divestiture bucket.”
For Flipkart, a big but money-losing ecommerce operation, Walmart is paying a record $16 billion. That’s a brimful of asha, or if you will, Asda: Officials note the potential benefits of the deal go beyond establishing a presence in fast-growing market, but could also provide Walmart with “talent, technology, customer insights and agile and innovative culture [that] will benefit Walmart in India and across the globe.”
Even the Asda deal itself could continue spinning benefits for Walmart, which plans to retain a 42% stake in the combined Sainsbury-Asda company, the U.K.’s new largest grocer. Sainsbury, for example, could provide plenty of know-how in food, said Steve Dresser of U.K. consultancy Grocery Insight. Sainsbury’s Argos subsidiary—a U.K.-based digital electronics and home goods retailer that also has 800 physical units there, many in Sainsbury stores—could be expanded in some form to the U.S., Dresser speculated, where it could be a “huge Amazon defeater.”
It’s a new world.