Sainsbury’s and Asda: What does the merger mean for us?
This week one of the biggest shakeups in the UK grocery market for years was announced – Sainsburys and Asda are merging, or at least hoping to if the Competition and Markets Authority gives the deal the green light. The combined entity would have around a 1/3 share in the UK grocery market, as well as becoming a very significant player in the general merchandise retail market.
So why now? Why this deal? The merger has to be seen in the context of the changing shape of the UK grocery market. With the success of the discounters Aldi and Lidl, and the looming presence of Amazon, there is significant pressure on both Sainsburys and Asda. Asda’s traditional focus on its price credentials has made it a tough few years as the discounters have been able to undercut it, combined with changing shopper behaviour – smaller more regular top-ups throughout the week rather than a big weekly shop – have left Asda struggling with its big superstores. This makes the merger with Sainsburys an attractive proposition for Asda and its owner Walmart. Mike Coupe, CEO of Sainsburys, claims that the merger will deliver £500 million of ‘synergies’ and allow them to deliver a 10% price cut to shoppers.
The combined retailer will also be a truly multi product player. With Sainsbury’s owning Argos and Habitat, and the strength of Asda’s clothing brand George, the combined force could potentially be a retailer that is able to mount a significant challenge to Amazon. Argos has a pretty impressive ecommerce offering, especially with its Fast Track offering, so if it can spread these learnings across all the brands, when Amazon does make the leap into the grocery market as well, Sainsburys and Asda will be able to compete as a similar multi-product offering. The merger may prompt Amazon to make its much-anticipated move into UK grocery, with Morrisons being their most likely acquisition given their established partnership.
So what does the merger mean for us all? As Mike Coupe has promised, it should mean price cuts for shoppers. This spells difficult times for suppliers as the combined buying power of the two retailers will give them even more power in negotiations, and Coupe seems to be suggesting much of the price savings would come from suppliers. At the moment, it seems that both brands will remain separate entities, but if we all know that they are using the same supply chain, will we be willing to pay a different price in Sainsburys and Asda for the same product? Sainsburys trades on a quality proposition, Asda on a price one. Can the combined business make the most of cost savings of the merger without muddying either brand to the cost of both? There is definitely a space for both brands, and they do have different audiences, but the success of the merge will be dependent on whether the combined entity can make the most of behind the scenes savings, will retaining each brand’s unique position.
The approval of the CMA is by no means guaranteed, much rests on how it defines the new retailer’s competitive set. Can you compare the new Asda and Sainsbury’s combination to Aldi and Lidl as well as the other supermarkets? Can you include Amazon? In the changing UK grocery and retail marketplace, this deal may just get through, which would have been unthinkable just a few years ago. We will have to see what the next year brings.
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