This week’s preliminary findings from the CMA cast serious doubt over the proposed merger between Asda and Sainsbury’s. The CMA suggests two likely outcomes of its inquiry (the final decision due on 30 April); either blocking the merger or forcing the sale of assets and operations.
The latter would effectively block the deal as significant disposal of profitable stores from the merged group would most probably make the deal financially unviable.
The CMA’s preliminary findings are very surprising indeed. They do not follow precedent and, perhaps more concerningly, they suggest the CMA does not truly understand the competitive dynamics of the UK grocery market. The merged group would be a similar size to Tesco and as such, Asda/Sainsbury’s would become a second super-heavyweight grocer in the UK – with enlarged economies of scale and deeper investment budgets to fuel innovation.
The idea that Tesco would respond to the merger simply by watching from the side-lines taking no action is ridiculous. The most likely outcome would be a price war.
Of course, it’s also worth noting that Tesco was given the green light to merge with Booker in 2018. While that merger was allowed because Booker is a wholesaler, the result of the transaction is a larger, more powerful Tesco in the UK food supply chain, which currently towers over its competition. There is a strong argument to say that a merged Asda/Sainsbury’s business would actually level a currently unlevel playing field.
The bigger issue here, however, is the role of discounters. It is firmly our view that the CMA has underestimated how closely the likes of Aldi and Lidl compete directly with the big four, both at a national level and locally in towns and cities across the UK.
Anyone observing the UK grocery market over the past decade will be well aware of the disruption caused by the rapid growth of discounters, putting a firm end to the comfortable oligopoly previously enjoyed by the big four. Millions of shoppers have switched shopping trips to discounters, resulting in sharp price reductions at the big four. These price cuts were not an act of charity, but a commercial imperative necessary to survive in an aggressively competitive market.
For the sake of clarity, let there be no doubt - Aldi and Lidl are direct competitors of the big four at a local level. While their stores are smaller, they stock only a fraction of the lines and they sell only a limited number of brands, the acid test for us is shopper perceptions.
Here we have consistently seen in 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’.
Clearly, these are preliminary findings which Sainsbury’s and Asda plan to challenge. It is our view that the CMA should reconsider the evidence and take a closer look at the competitive impact of the growth of discounters in particular. We suggest they look beyond just the analysis of spreadsheets and get out to speak directly to the shoppers whose interests they represent.
Should this deal collapse it could have far-reaching consequences for the UK grocery industry. For example, it may lead to an acquisition from other retail behemoths, over which the CMA would have little control. Now that really could result in less choice for customers, a shake-up for suppliers and a vastly altered shopping experience.
The CMA need to consider the law of unintended consequences.
Alastair Lockhart is the insight director of Savvy