Walmart retreats from its UK Asda business to hone its focus on competing with Amazon

Walmart’s strategy to get itself fighting fit against Amazon saw one more development today.

This morning, UK supermarket chain Sainsbury’s announced a deal with Walmart to buy a majority stake in Asda, Walmart’s wholly-owned UK subsidiary. The deal values Asda at £7.3 billion ($10 billion), and if it closes will net Walmart £2.975 billion ($4 billion) in cash, a 42 percent share of the combined business as a “long-term shareholder”, and 29.9 percent voting rights in the combined entity, which will include 2,800 Sainsbury’s, Asda and Argos stores and 330,000 employees in the country.

Walmart also today disclosed that it will also recognize a non-cash loss of approximately $2 billion, “based on the current value of shares to be received and current foreign exchange rates.” (The pound and the UK economy have been having a hard time since the Brexit referendum.)

The news underscores how Walmart, off the back of a challenging quarter of e-commerce sales in the crucial holiday period (news that shook investors enough to send Walmart’s sock tumbling), is still trying to figure out the right mix of its business to fight off not just current retail competition, but also whatever form its competition might take in the future. At the moment, the one big common rival in both of those scenarios is Amazon.

In the US, Walmart has been trying out multiple routes for consumers to shop in new ways that address the kinds of options that the likes of Amazon now offers them. Targeting different geographies and demographics, Walmart has made big bets like its $3 billion acquisition of; expanding its own new delivery services, and payment and return methods; as well as running pilots with various third parties like Postmates and DoorDash.

Internationally, it’s a different story. Walmart has a significantly reduced presence — its international business in aggregate is around one-third the size of its US business, $118 billion in FY2017 versus $318 billion. And with no clearly dominant position in any of its international markets, this has led the company to consider a variety of other options to figure out the best way forward.

“This proposed merger represents a unique and bold opportunity, consistent with our strategy of looking for new ways to drive international growth,” said Judith McKenna, president and CEO of Walmart International, in a statement. “Asda became part of Walmart nearly 20 years ago, and it is a great business and an important part of our portfolio, acting as a source of best practices, new ideas and talent for Walmart businesses around the world. We believe this combination will create a dynamic new retail player better positioned for even more success in a fast-changing and competitive UK market. It will unlock value for both customers and shareholders, but, at the same time, it’s the colleagues at Asda who make the difference, and this merger will provide them with broader opportunities within the retail group.  We are very much looking forward to working closely with Sainsbury’s to deliver the benefits of the combined business.”

“We believe the Combination offers a unique and exciting opportunity that benefits customers and colleagues,” said Doug McMillon, Walmart’s president and chief executive officer, in a statement. “As a company, we’ve benefited from doing business in the UK for many years, and we look forward to working closely with Sainsbury’s to deliver the benefits of the combination.”

The UK market is a prime example of the kind of scenario that hasn’t been working as well for Walmart as it could, and I think that the decision for Walmart to move back from its UK business has a strong link to the Amazon effect on the market.

In the UK, Asda is number-three in supermarket share, with a 15.6 percent stake, after leader Tesco and Sainsbury’s. All three of the leaders focus on traditional supermarket formats, and their modern-day UK twists. This translates to huge stores with multiple selections for each product ranging from bargain tiers to more expensive, premium varieties; sizeable chains of smaller convenience store-style locations; and online delivery of varying popularity.

The three tiers of operations may sound like diversification, but it’s actually very undiversified within its category, making for extreme price competition on products themselves (and that happens both before and after you buy: another smaller competitor, the online grocery delivery Ocado, regularly refunds me money, unprompted, on products it says are sold for less at competing stores).

On top of that, the big three have all been cannibalised in recent times — in part because of the insurgence of smaller, discount stores like Aldi and Lidl that forego brand names in favor of a smaller selection of often their own brands at a cheaper price (a little like Trader Joe’s, which is owned by Aldi, but often much less expensive); and in part because of a big shift to shopping online, an area where Amazon is hoping to only get bigger and is investing a lot. In addition to Amazon’s Whole Foods acquisition, in the UK specifically, this has included rumors that it’s eyed up the online-only shopping service Ocado, and it partners with another UK supermarket chain, Morrisons.

The fact that Amazon is now also branching into physical locations on the back of its strong online sales and corresponding logistics record is a major threat to Walmart and others that have built physical businesses first, and I think that Walmart has assessed all of the above and decided to throw in the towel on trying to tackle it on its own.

Notably, while Walmart on its own has been unable to reach a number-one position in the UK market, combined with Sainsbury’s (and as a minority partner) it will. Asda and Sainsbury’s would have a market share of over 31 percent (Sainsbury’s today has 15.8 percent; Asda 15.6 percent), putting it ahead of current leader Tesco (27.6 percent). That also means that the deal will face regulatory scrutiny, and might get scuppered, or come with sell-off caveats, to go ahead.

The news about Asda in the UK comes amid a series of other chops and changes in Walmart’s business outside of its core US market.

In India, Walmart is inching closer to a deal to acquire a majority stake in online retailer Flipkart, the largest online retailer in the country that itself is feeling a lot of heat from Amazon.

Walmart’s $10 billion – $12 billion deal for Flipkart, which is now expected to be close at the end of June, would give the company a 51 percent stake of Flipkart, valuing the Indian online giant at about $18 billion. Amazon has made India — a fast-growing economy with strong consumer trends embracing digital commerce — a large priority in its international strategy, with plans to invest some $5 billion into its efforts in the country.

Looking ahead, Walmart is also rumored to be looking at stepping away from Brazil.

It’s a long-term plan for the company. Two years ago, Walmart placed its e-commerce efforts in China into a venture with Alibaba’s as a partial retreat from that market.

After that Walmart seemed to put its efforts there on hold — its local Chinese corporate site ceasing to update after 2016 but not disappearing altogether. But more recently, just last month in fact, in a signal of how it hopes to continue to combine physical and digital retail — or online-to-offline, as its often called — Walmart opened a pared-down “high tech” supermarket. Here people can shop for a select number of food and other items, as well as browse for these and many more to buy online on JD Daojia (the JD venture) while in-store, and have them delivered.

The latest store in China, and Walmart’s approach there, could be an interesting template for what we might expect in the UK if its sale gets the green light from regulators. Sainsbury’s also owns Argos, a retailer that has essentially been built on the catalog and online sales model: there is no large-presence retail floor, and instead, people order items — either at a counter in the store itself, or online — and either have them delivered or pick them up at another counter in the shop itself. Could we see a scenario of similar “high-tech” supermarkets open in the UK, where the Asda brand is used in a similar turn with subsequently greatly reduced retail footprints?