Sainsbury’s-Asda merger: industry reaction

Sainsbury’s has agreed terms with Walmart on a mega merger that will see it takeover Asda.

The pair are making the move against a backdrop of buoyant German discounters Aldi and Lidl, Brits’ changing shopping habits and a growing online sector, with Amazon increasing its influence following the acquisition of Whole Foods last year.

“We were always expecting something to happen to consolidate the grocery market; the middle ground has been squeezed the most by the inevitable march and expandability of the discounters, whilst a reinvigorated Tesco with Booker under its wing is less arrogant and more relevant than before with support from suppliers and conversion with shoppers,” says Catherine Shuttleworth, CEO and founder, Savvy Marketing

The deal has upsides and downsides, according to Neil Saunders, managing director, GlobalData Retail. The combined entity would have a 22% share of the UK's food and grocery market, well above the share of the current leader, Tesco, which has 17.7%. 

“Such a dominant position in grocery, along with the combined non-food business which includes Sainsbury's Argos division, would create many opportunities for cost savings and buying efficiencies,” he says. “The deal is also genuinely additive in that Sainsbury's and Asda have different market positions both geographically and in terms of the demographics they serve. There is some overlap, but it is far more minimal than that between, say, Sainsbury's and Tesco.”

However, these advantages also create problems. On the scale front, any deal would require approval from competition authorities. “Given the highly consolidated market, it is likely that scrutiny would be high and an investigation prolonged. Furthermore, we believe that even if a deal was ultimately permitted, it may be subject to remedies such as store disposals and other measures which would be disruptive,” says Saunders.

The differences between the two groups make a true merger almost impossible. “Although it could be combined corporately, we believe it would be folly for the new entity to completely merge operations and brands. This limits the scope for savings and efficiencies and, if anything, adds complexity.”

Saunders also questions how Sainsbury's intends to generate growth from Asda, bearing in mind that big hitting Walmart struggled with its UK arm for years. “These negative factors mean a deal is far from done. In our view, they also indicate that this is a defensive play. As necessary as they can be, moves made in defence are not always the most creative or sensible,” he concludes.

L-R: Mike Coupe, CEO, Sainsbury's; Judith McKenna, CEO Walmart International; Roger Burnley, CEO Asda
L-R: Mike Coupe, CEO, Sainsbury's; Judith McKenna, CEO Walmart International; Roger Burnley, CEO Asda

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