Asda, Sainsbury point to modern retail dynamics in bid for UK clearance
30 April 2018. By Andrew Boyce.
When retailer J Sainsbury announced over the weekend that it was in advanced talks about a merger with rival Asda Group, it sparked a raft of concerns about the future of Britain’s grocery industry.
Lawmaker Rebecca Long-Bailey, from the opposition Labour party, said the deal risked “squeezing what little competition there is” in the UK’s grocery market. Former business secretary Vince Cable also called for scrutiny of the combination.
But whether Sainsbury’s can win approval for the deal — and at what price — is more likely to hinge on how the Competition and Markets Authority views the changing face of UK retail and the dynamics of local markets.
It might also depend on how far the CMA agrees with the two retailers when they say that Britain’s grocery market is going through a “significant and rapid change” led by online sales and by discount retailers such as Aldi and Lidl.
Sainsbury’s confirmed today that it had agreed to merge with Asda in a cash-and-stock deal valued at about 7.3 billion pounds ($10 billion).
London-based Sainsbury’s has already accepted that its proposed deal will warrant an extended investigation, and stores may need to be sold off. Today it said it would request that the CMA “fast-track” its review to a phase II probe.
— Tesco challenger? —
Sainsbury’s agreed merger with Leeds-based Asda would combine the UK’s second- and third-biggest food retailers. The combined company would own more than 2,800 stores in Britain.
Tesco, Britain’s current No. 1 food retailer, owns some 3,500 supermarkets across the UK. Last year, Tesco boosted its operations when it agreed to acquire the country’s biggest food wholesaler, Booker Group.
Sainsbury’s is expected to argue that its deal won’t harm competition due to the fast-changing nature of the UK’s grocery industry. It would likely point to the growth of discount retailers such as Aldi and Lidl, as well as the changing preferences of shoppers, who are increasingly shopping online.
The deal will create a “more competitive and more resilient business” that would be better placed to “invest in price, quality, range and the technology to create more flexible ways for customers to shop,” Sainsbury’s and Asda said in announcing it today.
The agreement will see Sainsbury’s pay US retailer Walmart — Asda’s owner — 2.98 billion pounds in cash. Walmart will also hold 42 percent of the shares in the combined company.
— Local focus —
In past reviews, the CMA has assessed the impact of such retail mergers on both nationwide and local markets. That’s immediately clear through the way it reviewed Tesco’s takeover of Booker in 2017 (see here).
Sainsbury’s will probably argue that there’s no reason for the CMA to diverge from that approach, even if it could result in demands to divest some stores.
The UK’s food-retail market can be “fragmented” along several lines, the CMA said in its decision to approve the Booker deal. For example there’s the large national retailers Tesco, Sainsbury’s, Asda, Morrisons, Waitrose, the Co-operative Group and Marks and Spencer.
In another bracket there’s also the discounters of Aldi, Lidl and Iceland Foods. That’s in addition to “a very large number of smaller grocery retailers” such as independently-owned convenience stores.
“The largest growth in UK grocery sales in recent years has been in online sales” — such as from Amazon — “and in discount retail,” the CMA noted in its final report on the Tesco-Booker deal.
Sainsbury’s and Asda may also push that argument that life for consumers in 2018 is a world away from a market dominated by four big brands, enticing consumers to hypermarkets on the edge of town.
Consumers surf from their couches and have their weekly shop delivered to their front door. They also top up with purchases from smaller express stores.
But opponents of the deal will say the Amazon threat is still a mirage. While the online giant may be gearing up for a challenge, it has failed to make serous incursions in the market and doesn’t constitute a competitive threat, yet.
Sainsbury’s and Asda plan to complete their deal in the second half of 2019. Shares in J Sainsbury trade on the London Stock Exchange. Walmart is listed on the New York Stock Exchange.
We may contact you with details of other LexisNexis products, services and events we believe you may be interested in as a result of your relationship with us. You can amend your communication preferences via our MLex Preference Center.