Written by: Rebecca Priya Stopps
Sainsbury’s is the UK’s second largest grocery retailer, operating a network of grocery stores, petrol filling stations and an online grocery business. In addition to selling other merchandise such as toys and clothing, Sainsbury’s also owns Argos and Habitat. Sainsbury’s operates around 1400 grocery stores. Asda is the UK’s third largest grocery retailer, operating grocery stores, petrol filling stations and other merchandise. Asda operates around 600 grocery stores.
Sainsbury’s and Asda have agreed to combine their businesses, creating the UK’s largest supermarket chain. The merger will result in them taking a market share of 31.4%. The next largest supermarket will be Tesco, with 27.6% of the market. Tesco has dominated the UK’s grocery scene since taking over from Sainsbury’s in 1995.
It is not quite a merger of equals. Sainsbury’s will retain majority control, after paying £2.975bn to Asda’s parent company, Walmart. The two companies are likely to keep their respective branding. Interestingly, Sainsbury’s have a large market share in the south of the country, whereas Asda take a larger percentage of the market in the North. It is thought that, with the combined power of both supermarkets, the merger could lead to a ‘supermarket-titan’.
The U.K.’s Competition and Market’s Authority’s (CMA) initial investigations raised sufficient concerns for the merger to be referred for an in-depth review. Earlier this year, Sainsbury’s and Asda asked the CMA to move directly to the in-depth ‘phase-two’ part of the inquiry in order to save time.
The CMA has recently launched the second stage of its investigation into the proposed £12bn merger between Sainsbury’s and Asda. Evidence will be gathered about the proposed merger, through customer surveys and engagement with suppliers and retailers to inform a detailed analysis. The CMA has said that members of the public and other interested groups will be invited to give their views on the investigation.
The primary aim of this investigation will be to assess whether the merger could restrict consumer choice, lead to higher prices or lower quality of production.
Around £190bn is spent each year on food and groceries in the UK, emphasising the importance for the CMA to thoroughly investigate any possible ramifications of the merger on consumers. This article will explore the potential impacts of the Sainsbury’s-Asda ‘mega-merger’ on the market, consumers and suppliers.
A Substantial Lessening of Competition?
The Sainsbury’s-Asda merger has the potential to disrupt the supermarket sector significantly. In assessing whether a merger may give rise to a substantial lessening of competition, the CMA takes into account a multitude of factors. It may take into account constraints both within and outside the relevant market, segmentation within the market, and the respective importance of particular constraints. For example, the CMA will evaluate whether a substantial lessening of competition may arise as a result of horizontal unilateral effects in the retail supply of groceries in physical stores. For example, in 2016 the CMA expressed serious concerns to the European Commission about the O2-Three merger for similar reasons. The merger was eventually blocked by the Commission.
The CMA has said that the Sainsbury’s-Asda merger could damage competition in 463 areas. This raises the possibility that the grocery chains may have to sell hundreds of stores, for fears that the alternative will result in a substantial lessening of competition, contrary to Article 102 TFEU.
The CMA recently released an Issues Statement, ‘Anticipated Merger Between J Sainsbury PLC and Asda Group Ltd’. Within this, the CMA have said that as part of the phase two investigation, consideration will also be had, as to how the merger may affect competition in each of the different product markets in which the parties operate.
The CMA will consider whether entry or expansion by competitors could prevent a substantial lessening of competition that might otherwise occur. For example, the CMA will explore whether entry/expansion is likely to occur soon, whether it is likely (including any plans and the certainty of those plans), and whether this is sufficient to prevent a substantial lessening of competition. This is especially relevant to companies that have expanded in recent years such as Amazon.
Furthermore, Morrisons, as the UK’s fourth-largest supermarket, may be in a position to benefit from the proposed merger. Sainsbury’s chief executive has admitted that of Sainsbury’s 644 supermarkets in the UK, 138 are within a mile of an Asda store. This will undoubtedly raise competition issues if they are owned by the same company. Morrisons will have an opportunity to expand into London, in particular. Sainsbury’s and Asda may be forced to sell some of their stores if competition concerns are raised. Morrisons is in the best financial position to be offered the opportunity to acquire stores . While mandatory store sell-offs are probable, the CMA is unlikely to deem the merger a substantial lessening of competition.
More Benefits for Consumers?
The merger has the potential to bring many advantages to consumers. The supermarkets have already promised savings for consumers in the future, due to improved economies of scale and distribution efficiency. Sainsbury’s and Asda have publicly announced that the merger is expected to generate £500 million of synergies net of any price investments and will therefore allow them to reduce the prices of many products.
The supermarkets say that as a result of the merger, they expect to be able to lower prices by around 10% on many popular customer products.Sainsbury’s CEO has said that the new company would enable greater investment in technology and allow them to offer a better service for consumers. The CMA will focus on the nature of the savings and the likelihood that these savings will actually be passed on to consumers. Although the merger has the potential to exploit, rather than benefit consumers, this does not mean it will necessarily do so.
Could This Benefit Suppliers?
Sainsbury’s CEO Mike Coupe has said that suppliers will benefit from growing with a larger business and a streamlined supply chain. In reality however, the deal is unlikely to benefit suppliers. Industry bodies fear that life will be made difficult for smaller suppliers who are already absorbing higher costs, due to a weaker pound post-Brexit vote. Another issue for suppliers is that the ‘supermarket-titan’ could seek to pressurise suppliers into unfavourable contract terms by holding the threat of losing business over them. Whilst many suppliers rely on big supermarkets as their main source of business, perhaps larger suppliers still have some leverage when bargaining with these supermarkets. Ultimately, supermarkets will always need to retain their top-selling brands and suppliers can use this to their advantage.
Is This ‘Much-Needed Growth’ Within the Changing Grocery Landscape?
The main supermarket chains have been looking to find new sources of growth as competition intensifies. This follows a dramatic change over the past decade, with online giants such as Amazon changing the face of retail and driving many smaller shops out of business. Amazon does have the potential to become a major player in the grocery sector with the development of its Amazon Pantry. Aldi and Lidl have also been particularly disruptive to the supermarket scene, discounting prices and eating into the traditional grocery store’s market share.
Back in 2015 Britain’s ‘big-four’ supermarket chains – Tesco, Asda, Sainsbury’s and Morrisons – were suffering from falling sales as they were squeezed by Aldi and Lidl at one end of the market and Waitrose and Marks and Spencer at the other. Whilst the ‘big-four’ have scrapped new store openings in the past in order to save money, budget supermarkets such as Aldi have surged in growth. Collectively, they hold over 12% of the market and plan to open 800 new stores by 2022. Perhaps these significant moves are now essential for the ‘big-four’ , in order to remain on top in the everchanging market. This merger is undoubtedly a statement of intent from and it will be interesting to see how this deal affects the market.