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Sainsbury’s-Asda merger brought to heel by CMA – what next for suffering Sainsbury's?

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Sainsbury: merger plans dead, leaving 'big orange' squeezed on all sides
Sainsbury: merger plans dead, leaving 'big orange' squeezed on all sides

The proposed £13billion merger between Sainsbury’s and Asda has been officially blocked by the Competition and Markets Authority (CMA), which claims in its definitive report that the move would cost shoppers more and would squeeze suppliers.

 

The merger was proposed a year ago and promised to bring some £1 billion of savings to consumers across both grocery and petrol sales at the two giants. The CMA thinks otherwise: it believes that the consumer would actually be worse off after the deal, with suppliers also squeezed by such a large single entity in the market.

 

The CMA also was very concerned about how merging two of the largest supermarkets would reduce competition in the market, both in the aisles and at the petrol pumps and that that would be a problem for shoppers in the longer run.

 

Stuart McIntosh, chair of the CMA’s inquiry group, says that "It would reduce competition in supermarkets and online grocery shopping and at the companies’ petrol stations. We think that is likely to lead to higher prices or other changes which would be unwelcome to shoppers, such as longer checkout queues."

 

The CMA surveyed 50,000 of the supermarkets’ customers asking them if they thought that the merger would release the promised £1 billion of savings in grocery shoppers’ pockets: it found wariness. "Those promises were based on cost savings which we don’t think are likely to be realised. Also those price promises are very likely to be difficult to track in practice," McIntosh says.

 

Sainsbury’s boss Mike Coupe hit back by saying the regulator is "effectively taking £1 billion out of customers’ pockets". But he says the supermarkets would not appeal against the decision. "The CMA’s conclusion that we would increase prices post-merger ignores the dynamic and highly competitive nature of the UK grocery market," Coupe told the BBC this morning.

 

"The news [of the Sainsburys-Asda merger collapse] was hardly a surprise," says Melissa Wade, Retail Consultant at BJSS. "It was always going to be an ambitious move combining the 2nd and 3rd largest UK grocers, but the risk of a substantial lessening of competition (SLC) and its negative consequences was too great for the CMA to ignore. Despite the promises of £1 billion in savings for consumers – through supplier discounts due to increased volume – I believe that the CMA has done the right thing by them and ,as a result, has strengthened the rigorous process they take when considering such mergers. The potential impact that the merger could have had on where consumers shop, what they buy and how much they spend across both grocery and fuel would not have been fair – particularly at a time when spending is so tight."

 

The move comes following a year of slow market share decline for Sainsbury’s which has lost out to Asda. Sainsbury’s now finds itself in the squeezed middle between discounters such as Lidl and Aldi and the higher-end supermarkets such as Waitrose and M&S. Where it goes now is going to be a challenge and Sainsbury’s should be worried, believes William Hall, Strategy Director, global branding and design agency, Landor.

 

“Although today’s announcement is what many expected, the decision will be of particular concern to those in the driving seat at Sainsbury’s," he says. “[Sainsbury’s] needs to re-establish its place in an increasingly polarised market, with discounters like Aldi and Lidl on one side of the spectrum and premium players like Waitrose on the other. Sainsbury’s finds itself somewhere in the ‘murky middle’, lacking relevance for the modern shopper and becoming increasingly difficult to tell apart from the rest of the crowd. It needs to see today’s announcement as a springboard for change, by reconnecting with its heritage as a company that understands what its traditional customer base wants. Asda, on the other hand, has a clear and focused proposition for its customers – saving you money so that you can live better."

 

BJSS’s Wade agrees: "Mike Coupe now has a real job on his hands to create a positive back-up plan without further highlighting concerns about their current position. A continued focus on strategic rationalisation of its physical estate, its tie up with Argos and strengthening its food offer will put them in good stead to recover. Meanwhile, with Asda still potentially up for sale, it will be interesting to see who will be circling next. A period of uncertainty for both, but an exciting time to see where they turn to next."

 

Hall sums it up neatly: “One thing’s for sure, though: there’ll be no joyous singing of We’re in the money from Mr Coupe this time around”.

 

And what of Asda? It is nearly 20 years since Walmart bought it to try and create the number one grocery chain in teh UK – it hasn’t managed that. Many wonder if Walmart couldn’t do it, can anyone? This raises two interesting prospects: firstly, could Walmart divest itself of Asda? The move to tie up with Sainsbury’s was all but that in effect and would probably have seen Asda eventually divested from Walmart. Secondly, could such a move be the in that Amazon needs to conquour UK grocery?

 

Amazon is already making noises about entering the UK grocery market more fulsomely, getting its hands on Asda could help it leapfrog all comers. While Walmart failed, Amazon may just make it work – it has deep enough pockets, after all. The proposed merger was mooted, in part, to take on Amazon in the UK. Now the tables may well have been turned – and Amazon buying Asda would surely be something that all retailers would fear.

 

Image: Paul Skeldon/Internet Retailing Media Services

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