Outlook: Has Archie still got the urge to merge?

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The Independent Online
So is that the end of the putative Asda-Safeway supermarket link- up? The short-term possibilities certainly looked more remote after yesterday's update from Asda. Allan Leighton was definite that hostile bids are not the company's style. With a merger also apparently on the back-burner it looks like the supermarket industry's consolidation - if that's what we're seeing - may have to wait a while.

Of course Asda's management was careful to wheel out the "never say never" line. Nothing that was said yesterday precludes a renewed attempt at an agreed marriage.

Interestingly, Asda seems to feel that an agreed bid would stand more chance of getting through the competition authorities than a hostile offer. Logically, the reverse ought to be the case. A cosy get-together to create a third force in UK supermarkets that would almost equal Tesco and Sainsbury in size would diminish competition and ultimately inflict higher prices on consumers. Why should the Office of Fair Trading and Margaret Beckett be persuaded otherwise simply because Asda and Safeway both said so?

What is becoming increasingly clear is that Asda may not need a merger with Safeway to close the gap with Tesco and Sainsbury. Asda's sales growth is the fastest in the industry and its market share is now significantly higher than Safeway. Earlier this year these two companies were almost the same size. Now Asda is worth more than pounds 5bn and growing. Safeway is worth pounds 3.5bn and shrinking.

It is possible to dismiss Safeway's recent ills as little more than the normal swings of the supermarket industry's pendulum of fortune. A year ago the whipping boy of the sector was Sainsbury as it lost market share to Tesco and failed to match its rival on innovative marketing wheezes. Perhaps it is just Safeway's turn? But there are key differences. Sainsbury's is a historically sound business that just had a couple of bad years. Safeway is an ordinary one that had a good spell and has now reverted to type. Meanwhile, Tesco and Asda have both put in a five-year winning streak which looks like continuing.

Safeway is hardly a basket case but it looks desperately short of ideas and morale must have taken a pounding. Asda, meanwhile, has developed a successful formula of trading in larger stores, with wider ranges and at prices that are 5-10 per cent lower than rivals. And yet why does Asda still find it so hard to dispel the idea that a merger may be around the corner?