Asda and Morrisons focus on financial engineering

In 2021, Andrew Higginson, then-chair of Morrisons, defended private equity's reputation, asserting that firms like Clayton Dubilier & Rice focus on business growth rather than financial engineering. However, three years later, evidence suggests otherwise, as both Morrisons and Asda, another major buyout from 2021, have failed to gain market share. Asda's market share has plummeted from 14.3% to 12.6%, a significant decline in a sector where changes are typically minimal. Sainsbury’s has emerged as a clear leader, now holding a 15.3% market share, leaving Asda trailing. The financial health of both Morrisons and Asda is further illustrated by their debt ratings from Moody’s, with Morrisons still five notches below investment grade despite efforts to reduce debt by 35% through asset sales. Asda is similarly positioned, four notches away from investment grade, indicating a heavy reliance on debt. Despite having access to capital, as evidenced by Morrisons' acquisition of the McColls convenience chain, both supermarkets have struggled with operational challenges. Morrisons faced pricing pressures during the cost of living crisis, while Asda has been criticized for issues like product availability and long checkout lines. These operational shortcomings may be linked to the pressure to meet annual cash flow targets, suggesting that aggressive financial engineering has overshadowed genuine growth. In contrast, competitors like Sainsbury’s and Tesco have successfully capitalized on the market, highlighting the contrasting outcomes of private equity strategies in the supermarket sector.