For many families, the Christmas season leads to financial stress as they accumulate expensive debt. This year, some companies are facing a similar challenge.

The Guardian: “Asda owner faces rise in servicing £4bn debt, MPs told”.

In particular, supermarket chain Asda has caught the attention of the UK Parliament’s business and trade committee. MPs are worried that the chain has accumulated large debts, totalling more than £4bn, since its takeover by the billionaire Issa brothers and the private equity group TDR Capital.

The big fear is that increased borrowing costs could cause deeper problems for the retail chain, just as they can do for individual households. The cost of servicing a debt can increase when interest rates go up, which tends to coincide with consumers spending less in shops.

The owners and managers of Asda insist that the chain’s borrowing is under control, and that it has invested in its staff and customers – via pay increases and discounts, respectively – leading to downgrades in its credit rating. Co-owner Moshin Issa has defended his running of the company in Parliament.

But the reason for public concerns about retailer debt are clear. Many of the big failures in recent corporate history, especially in UK retail, came about as a result of heavy debt burdens. It can leave companies vulnerable to sudden market changes, or to creditors simply running out of patience.

Asda employs more than 150,000 people in the UK, which is why politicians are so interested in how it is run. There can be few constituencies in the country where Asda isn’t a significant employer.

Retail Gazette: “Best of 2023: Is private equity ownership slowly killing retail?”

The other fear about the trend to load companies up with debt is linked to the long term future of those businesses, leading Retail Gazette to question whether private equity is killing retail.

Private equity groups exist to invest cash in companies which they can improve, before selling up to yield a profit to their investors. Cynics believe that many beneficiaries of this treatment end up as a shadow of their former selves, claiming that the equity groups simply sell off assets, strip back costs, sell at a profit and leave the companies to sink or swim.

Analysts note also that it can be harder for retailers – especially those in the hyper-competitive UK supermarket sector – to compete when they are weighed down with debt. Morrisons, like Asda, is carrying a substantial debt burden after a private equity deal. 

Will the debt really be an issue when it comes to their competitiveness? It will be interesting to see how those two chains fare this Christmas, compared to their rivals.