No love for Sainsbury's and Asda merger

James Penn
May 7, 2019

The decision by the CMA or ‘Competition and Markets Authority’ to block the merger of Sainsbury and Asda came as little surprise, even if it was a huge disappointment to the companies concerned.

A strong indication that such a decision might be on the cards was given back in February when the CMA revealed its initial findings. Sainsbury’s shares crashed 18% after the announcement.

When the confirmation came through last Thursday the shares fell a further 5%, after the CMA decided on a complete block of the merger (rather than a forced sale of a large number of stores which would likely have negated all the perceived benefits of the combination).

The Sainsbury/Asda ‘story’ was that consumers would benefit to the tune of £1bn in reduced prices over three years, resulting from the increased buying power of the bigger entity.

But the CMA found that there were too many areas where the pair were dominant (though it reduced the number of stores where the competition was likely to be reduced from 620 to 530), and that the merger would more likely result in prices rising over the long term rather than declining.

The supermarket industry (always a competitive one) has got even more so in the past decade, as the cosy, long-standing oligopoly of Tesco, Sainsbury, Asda and Morrison has been disrupted by the growth of the discounters, Aldi and Lidl. The latter had been operating in the UK for many years, but the tougher post-crisis world – with its belt-tightening, and low real wage growth – has seen them emerge as contenders with a vengeance.

The soft underbelly that Tesco and its ilk opened up by taking their customers for granted – treating them as ‘cash cows’ for growth markets elsewhere – gave Aldi and Lidl the perfect opportunity to expose their no frills, cheap, ‘own brand’ offering to a wider public.

For Sainsbury, a combination with Asda would have reduced the ferocity of this onslaught. Management was confident given the ‘changing landscape’, and given Tesco’s acquisition of Booker was waived through the previous year, that they had a good case to make. For them (particularly Mike Coupe, the CEO who masterminded the merger), and for shareholders, the CMA decision has been a disaster.

Significantly, the CMA regarded the discounters as less important in competition terms than traditional ‘Big Four’ competitors like Tesco and Morrison.

The decision has been welcomed by two parties: supermarket suppliers, who would have been facing two huge customers in Tesco and a combined Sainsbury/Asda – which together would have had over 60% of the UK grocery market; and unions, given the likelihood of job cuts, store closures and rationalisation.

On balance, customers can probably be grateful too (though ‘counterfactual’ scenarios, like what the supermarket environment would have been like if the merger had been allowed, are always difficult to prove).

As a result of the recent slide, Sainsbury shares are now back where they were after the EU Referendum decision, and at levels, they first reached as long ago as January 1989 – yes, that’s 30 years ago.

Over that period Sainsbury shareholders have seen many things – a failed expansion in North Africa, a botched IT infrastructure update in 2004 under Peter Davies, the collapse of the Qatari bid in 2007, then more recently a five year resurgence under former CEO, Justin King, which is beginning to look like a distant memory.

At the time of the Asda merger announcement in 2018, CEO of Sainsbury’s, Mike Coupe, was caught inadvertently singing ‘We’re in the Money’ on camera.

This is likely to go down as one of the great corporate PR disasters of our time.

Tesco learned a few years ago, the dangers of being smug about the food retail business. Now Sainsbury is experiencing them too.

The opinions stated are those of the author and should not be taken as investment advice. Any recommendations may not be suitable for all, so please contact your financial adviser for further guidance. The value of investments can go down as well as up.

Continue reading