Sainsbury's/Asda: Gentle giant or retail monster?

Are we about to see a shake-up at the top of the UK grocery market?

“A great deal for everyone”. Sainsbury’s and Asda have decided to get hitched and they see only the upside.

By teaming-up the new Sainsbury’s/Asda group is promising lower prices, better quality, more choice and enhanced technology. This proposal is being presented as a giant win for everyone - staff, shareholders, suppliers and shoppers.

Sainsbury’s is offering Walmart £3 billion in cash, a 42% stake in the new group and two (non-exec) seats on the board. Sainsbury’s PLC will continue to be listed in London and run by Sainsbury’s executive team. Both supermarkets will continue to be run separately.

The combined business will be enormous: accounting for almost one third of UK grocery sales; employing 330,000 staff and running 2800 stores.

Shareholders are being seduced by better returns within two years, consumers are being wooed with the promise of 10% lower prices on “everyday items”.

The question is how will this be achieved?

When supermarkets cut prices, someone usually gets hurt. In this case, Sainsbury’s/Asda plans to squeeze the savings out of suppliers.

Sainsbury’s CEO Mike Coupe points out that 85% of in-store products are from 100 “large multi-national” suppliers, suggesting they can take this on the chin. Coupe points to a “track record of good supplier relations” - it’s about to be tested.

Sainsbury’s/Asda considers itself a gentle giant, others see a retail monster. The unions wail of disaster, opposition politicians are expressing alarm in a way that they didn’t in the recent Tesco takeover of Booker.

The transaction has to win support from shareholders and they will want a clearer sense of where Sainsbury’s thinks the £500 million of “synergies” are coming from.

“Operational cost efficiencies” is delightfully vague. That said, Sainsbury’s largest shareholder, the Qatari Investment Authority, has heard enough and is already on board.

Sainsbury's and Asda occupy second and third spot in the market share.

The most obvious hurdle is the Competition and Markets Authority. The merger proposal is being fast tracked to a “stage two” enquiry.

Traditionally the competition authorities have always worked on the basis that four “large players” is the magic number in retail. A Sainsbury’s/Asda tie-up would leave two supermarket groups - it and Tesco -with 60% of grocery market share. Their nearest rival, Morrisons, would have 10%.

Aldi accounts for 7.3% of the UK grocery market. Credit: PA

Much depends on the view the CMA takes of Aldi and Lidl. In 2008, a competition review of the supermarket sector - amid concerns about Tesco’s market power - decided both discounters were minnows.

Coupe is right, the market has “changed fundamentally” since then. Aldi and Lidl have been stealing business from the big players, hollowing out their market share. Their success is part of the spur for this deal.

Lidl makes up 5.3% of the UK grocery market. Credit: PA

Aldi and Lidl are undoubtedly bigger than they were, it’s not obvious the CMA will decide they are big enough to act as a check on the power of a combined Sainsbury’s/Asda.

Aldi and Lidl are terrific on price, less terrific on choice. The average LIDL carries a range of 2000 items - that’s less than one of Sainsbury’s smaller convenience stores. “Supermarket” grade is a listed range of 20,000 plus.

On the face of it, the local competition issues this merger throws up are easily dealt with. In regions where Sainsbury’s/Asda hold sway, the CMA can order them to offload stores to competitors. The national competition issue is less clear-cut.

Sainsbury’s/Asda expect the merger to complete by the end of 2019. If they are still waiting for clearance come April 2020 then both sides have the right to walk away.