(Bloomberg)—Walmart Inc. is parting with Asda, but the British grocer will always be part of Walmart.
Asda’s two-decade run as one of Walmart’s biggest international operations created a special relationship between the U.S. and British retailers, who on Monday revealed plans to combine Asda, No. 11 in the Internet Retailer 2017 Europe 500, with British rival J Sainsbury Plc, No. 4, in a $10 billion deal. Over the years, Walmart has hired Asda’s top talent and borrowed its innovations in everything from e-commerce to employee training. It has even adopted some of the Brits’ retail lingo.
“Asda’s ascendancy came from being seen as the best-run asset in the Walmart empire,” said Brandon Fletcher, an analyst with Sanford Bernstein & Co. and a former Walmart executive. “There was a notion that they had this magic sauce.”
Sainsbury shares rose as much as 2% in London on Tuesday, extending Monday’s 15% gain. Walmart dropped 0.8% in premarket trading.
Walmart will retain a 42% stake in the combined company, but perhaps of greater value are the Asda-developed executives and ideas. These have helped Walmart transition from a struggling brick-and-mortar retailer to a nimbler, more digitally focused merchant that can go toe-to-toe with Amazon.com Inc. Typically, the credit for that evolution goes to Marc Lore, the e-commerce whiz who came to Walmart when it acquired Jet.com. But Asda’s influence, while not as apparent, runs longer and deeper.
About 18% of retail sales take place online in Britain, compared with about 12% in the U.S.
Walmart’s senior management roster is sprinkled with former Asda executives, including Judith McKenna, who heads the company’s international business and Mark Ibbotson, the executive vice president of U.S. central operations—a key role that oversees 4,700 stores and whips lagging locations into shape. Asda hires brought fresh ideas to Walmart’s Bentonville, Arkansas, headquarters, while diluting its hidebound corporate culture along the way.
“They have acquired great human capital with the managers that have run the Asda business,” said Ken Harris, managing partner at Cadent Consulting Group, who’s advised retailers and consumer-product companies for more than 25 years. This “seasoned group of talent” knows how to compete against any rival, he said.
McKenna, who took over as head of the company’s international unit earlier this year, is the highest ranking of the group. Before her promotion, the Middlesbrough, England native was chief operating officer in the U.S., where she launched curbside pickup of online grocery orders and helped develop the employee academies that trained 250,000 workers last year.
The drive-up grocery service—which will expand to more than 2,200 locations this year—has proven popular and offers Walmart a key advantage over Amazon, which is still trying to figure out the fresh-food business. The concept was largely pioneered at Asda, which installed its first drive-through “click and collect” location in 2012 and had 600 of them by 2014.
Britain’s smaller size and denser population than the U.S. lends itself to e-commerce, and this has helped fuel the online success of retailers like Asda and rival Tesco Plc, No. 5. About 18% of retail sales take place online in Britain, compared with about 12% in the U.S.
‘Stores of learning’
The idea for Walmart’s academies also came from Asda, where they’re called “Stores of Learning.” Previously, Walmart employees got most of their training on the job, which meant tasks were fulfilled according to the whims of the store manager. Today, Walmart insists that its stores adhere to a practice from Asda called “One Best Way”—a centralized guide for everything from stocking shelves to dealing with customers. Store managers are also brought to Bentonville for training, which wasn’t done regularly before.
McKenna, an accountant by training, also scrapped an ineffective inventory-management system in the stores and replaced it with one developed inside Asda, which has helped reduce out-of-stock items. Ibbotson, who started his career at Sainsbury, also worked with McKenna at Asda.
Another one of her top lieutenants is Richard Mayfield, who held senior roles at British retailer John Lewis before joining Asda in 2012. Even Sainsbury CEO Mike Coupe, the architect of this week’s mega-deal, worked for Asda in the late 1990s.
While Asda wrote the blueprint for many Walmart practices today, it wasn’t immune to the cutthroat nature of the U.K. grocery market, as the intrusion of German discounters and the revival of market leader Tesco have taken a toll on Asda’s market share and profitability.
The British grocer’s operating profit margin of 3.5% is narrower than that of Walmart’s overall business, according to Bill Dreher, an analyst at Susquehanna Financial Group. So, Walmart’s margins should tick up about 10 basis points as a result of the deal, he said.
The Sainsbury transaction will let Walmart “expand into much higher growth markets of China and India, and away from the extremely competitive and slow growth U.K. market,” Dreher said in a research note. He noted, however, that “the lessons learned, and many executives maintained from Asda, will benefit Walmart going forward.”
Walmart is No. 3 in the Internet Retailer 2018 Top 1000.