Catherine Shuttleworth, owner of Savvy shares her thoughts and analysis on the Asda-Sainsbury’s merger.
As anticipated, the CMA have outright rejected the Sainsbury ASDA deal this morning on the basis that they believe that prices would increase for customers in both food and fuel. They say that they have looked at the changed dynamic of the marketplace which makes it all the more surprising that they really think prices would go up. So back to the drawing board for both parties – with neither side sounding happy at the outcome. Let’s now see what the law of unintended consequences could bring to the grocery market.
**ORIGINAL COMMENT 28/03/2019**
There has been significant discussion about the Asda-Sainsbury’s merger ever since the news was broken that the two retailers were planning to join forces in a potential consolidation move within the food retail market that has been much discussed and expected.
The CMA enquiry into the proposed merger has produced a number of surprises – not least to the retailers themselves. As we head to the final part of the enquiry it is still difficult to call out how the situation will end.
The competition issue for Sainsbury’s and Asda has never really been disputed at a national level – after all the combined group would be similar in size to market leader Tesco – the competition issues have always been at a local level with geographical strengths in various parts of the UK so there was always going to be overlap. Last week a statement was made that the combined new business would look at disposing of 150 shops – it is difficult to imagine any position where disposals would not be unavoidable.
The issue of competition locally however has shone a light on the changed dynamic of the UK grocery market since the last CMA review when Morrison’s merged with Safeway. No longer do shoppers see a big 4, no longer do they hold loyalty with just one retailer and the days of one big shop are far behind us. Even since this merger proposal was put forwards M&S have announced their deal with Ocado, Aldi have opened their first convenience store and Waitrose has sold a package of stores to their competitors. There has never been a more competitive period in food retail and there is absolutely no signal that this will stop. Meanwhile margins remain under pressure, the impact of Brexit (however it concludes) is having a huge impact on both consumer confidence and everyone in the food supply chain and the way we shop for food (using ‘food for tonight’ providers such as Uber eats, Deliveroo and Just Eat) means that the traditional food retailers are having their businesses attacked from every angle. When it comes to competition there has never been more and the beneficiary of this is the shopper.
Last week significant additional commitments to transparency around audited savings on food and fuel were made and these, alongside the store disposal commitment, in my opinion – now shows that the merger is in the best interests of the shopper.
The point, in my view, that the CMA seemed to have missed so far, is that shoppers will choose with their feet whether this is a good deal based on what they pay at the checkout. If prices go up, product assortment is limited or store operations are poor, they will simply shop somewhere else. It is in no-one’s interests – shoppers or suppliers alike – to make this deal anti-competitive and it never was. We talk to 1000 shoppers a month through our savvy shopper panel and we know that after location, value is the critical determinator of choice when deciding where to do your food shop.
The CMA seem to be focused on the enlarged group’s buying scale, but we need to remember that Sainsbury’s and Asda are the second and third largest players respectively, and together they would have share similar to Tesco’s – but in buying terms given Tesco’s relationship with Carrefour, still gives them significant power.
A combined business would benefit immediately from better buying conditions, as it has already stated but it would apply the best buying terms of either company for each supplier. In addition it would have considerable scope to negotiate lower prices as a result of its enlarged scale. This, combined with the ongoing sourcing support from Walmart may be enough to allow Asda to realign its prices to regain share from discounters. The customer will be the winner and suppliers will benefit from increased volumes and a simpler way of working. Importantly, smaller suppliers will all benefit from moving to the better payments terms of 14 days offered by Asda.
Despite independent reports now presented to the CMA by Alix Partners and enhanced commitments made by both parties to the merger, it remains to be seen whether the CMA grasps the reality of the nature of shopper behaviour in the UK , but the unintended consequences of the deal being called off will likely have a much bigger impact on the UK shopper than it going ahead.