Sainsbury’s fights back amid tough retail market with Asda merger plans

Deal widely expected to be approved by competition watchdog based on the previous Tesco-Booker tie-up

Caitlin Morrison
Monday 30 April 2018 17:12 BST
Sainsbury's CEO: Sainsbury's-Asda merger won't result in any store closures

Shares in Sainsbury’s shot up more than 20 per cent at the open on Monday, and finished the day’s trading up 17 per cent, after the supermarket confirmed its plans for a £10bn merger with Walmart-owned Asda.

The decision is seen as a protective move, with Sainsbury’s seeking to scale up and carve out a bigger slice of the market as it fends off serious competition on two fronts: from retail giant Amazon, which has been moving in on the UK grocery space, and from discounters Aldi and Lidl, whose market share keeps growing. If the merger completes, the new company would take Tesco’s place as the UK’s biggest supermarket.

MPs debated the deal on Monday afternoon, after shadow business secretary Rebecca Long-Bailey tabled an urgent question asking the government to make a statement on the proposed merger.

Ms Long-Bailey said the transaction creates risks for workers, consumers and suppliers, as the combined supermarket group would have “never before seen bargaining power”.

“There are many risks associated with this deal... it could radically alter the whole grocery sector,” she added.

Sainsbury’s chief executive Mike Coupe, who will become CEO of the new company should the deal go ahead, said there were no store closures or job losses planned as part of the tie-up. However, he also said that the Competition and Markets Authority (CMA) may require that some shops be divested.

Patrick O’Brien, UK research director at Global Data Retail, said that as there are currently 75 Asda stores in the same postcode district as a Sainsbury’s (excluding Sainsbury’s Locals), it is expected that the CMA “will demand disposals”.

Business minister Andrew Griffiths said the two firms had chosen to fast track the CMA’s review and move straight to a phase two investigation, which could see the watchdog placing certain conditions on the deal, including potential sales.

It is widely expected that the CMA will allow the deal to go through without many changes given the relative ease with which the Tesco-Booker merger was cleared.

“We are not at all surprised to see further activity in the sector, post the unconditional clearance of the Tesco-Booker deal, [about] which there is still considerable incredulity in the trade from many suppliers, supermarkets and wholesalers alike,” said analysts at Shore Capital.

“In times gone by we would have quite simply said that the merger of Asda and Sainsbury’s cannot conceivably be approved on competition grounds, but we cannot do so anymore.”

Mr Griffiths also told the House of Commons that the merger would lead to “reduced costs for the consumer”. The companies said the tie-up would see prices come down by 10 per cent, which has raised concerns about how suppliers will be affected by the deal.

“Suppliers to Sainsbury’s and Asda face the prospect of potentially having to sell their goods at a lower price,” said Russ Mould, investment director at AJ Bell.

“A central part of the corporate tie-up between the supermarket companies is combined buying power strength. That is bad news for small suppliers who could be squeezed out of the market.”

However, Mr Coupe said the deal would “create a business that is more dynamic, more adaptable, more resilient and an even bigger contributor to the UK economy”.

“Having worked at Asda before Sainsbury’s, I understand the culture and the businesses well and believe they are the best possible fit,” he added.

“This creates a great deal for customers, colleagues, suppliers and shareholders and I am excited about the opportunities ahead.”

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