There has been speculation recently questioning whether the Asda-Sainsbury’s merger will go ahead after the two businesses requested more time to respond to the Competition and Markets Authority’s (CMA) inquiries (although to be fair, December is not known as a quiet month for retailers). There is certainly some evidence to suggest that the deal is unlikely simply to sail through the approval press.
The competition issue for Sainsbury’s and Asda have never really been disputed at a national level since the combined group would be a similar size to market leader Tesco, and at a local level, the two businesses look like a good fit.
So, what’s the problem? The CMA will be looking at stores town-by-town and city-by-city to find specific catchments that could suffer from weakened competition. If the number of store closures is too high – or the stores to be closed are the more profitable ones – the deal could become financially unviable.
A major consideration here is whether the CMA classifies Aldi and Lidl as direct competition to Sainsbury’s and Asda. If they don’t, the deal could be in trouble.
It is our view however that Aldi and Lidl are direct competitors. While their stores are substantially smaller, they stock only a fraction of the SKUs and they sell only a limited number of brands, the acid test for us is shopper perceptions. Here we have consistently seen in our research how shoppers are migrating spend directly from the big four to discounters, not only for top-up shops but for the main weekly shop. We see how shoppers are less concerned about brands, are prepared to make choices from a smaller selection and believe discounters’ quality to be as good as (if not better) than ‘the big fours’. When we speak to shoppers we are left in little doubt – discounters do directly compete.
Assuming the merger goes ahead, the next question is how the two businesses would work together.
The first point to make is that the management of the two retailers have been clear that both Asda and Sainsbury’s will continue to trade as separate facias. This makes good sense. First geographically, Sainsbury’s is more dominant in the south and Northern Ireland, while the bulk of Asda’s stores are focused in northern England and Scotland. Second, and perhaps more importantly, these two businesses have different propositions and core target audiences. While Asda’s focus has always been on low prices, Sainsbury’s offer emphasizes superior quality. Finally, Sainsbury’s also has a large convenience business, while Asda does not.
While the Asda and Sainsbury’s stores estates would be maintained, we expect there would be a change behind the scenes as the new group seeks to create efficiencies and ultimately improve competitiveness. Head office functions are likely to be consolidated over time, especially around central functions and systems. We would also expect, where possible, a consolidation of the two supply chains.
One of the most significant implications of the merger will be the enlarged group’s buying scale. Sainsbury’s and Asda are the second and third largest players respectively, and together they would have shared similar to Tesco’s. The combined business would benefit immediately from better buying conditions, as it has already stated that 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 Wal-Mart may be enough to allow Asda to realign its prices to regain share from discounters. In non-food, the combined business, incorporating Argos, will be the leader. Already the management have pledged to reduce prices by 10% across everyday products – this alone will help close the current price gap.
A final point worth noting is customer insight. Asda has traditionally struggled to really understand its shoppers due to its lack of a loyalty card. The merger will mean the Sainsbury’s Nectar scheme can be used across the whole business. This will deepen insight and will also open new opportunities to personalise the shopper experience across the two businesses.
The CMA is to release its initial findings in early February, with a final deadline set for 5 March. Until then, the rest of the market will wait with eager anticipation.
Alastair Lockhart is the insight director of Savvy