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Stores may have to be sold

Sainsbury’s or Asda brand may be axed to secure deal

Sainsbury's Local

Sainsbury’s and Asda may face some tough choices (pic: Terry Murden)


 

Competition watchdogs are suggesting Sainsbury’s and Asda either sell stores or ditch one of the brands amid concerns that their proposed merger will push up prices and reduce the quality of products.

The Competition and Markets Authority said there are “extensive competition concerns” and has found that the proposed deal could lead to a worse experience for in-store and online shoppers across the UK.

It also has concerns that prices could rise at a large number of Sainsbury’s and Asda petrol stations. The CMA’s comments sent shares in Sainsbury’s 12% lower in the first hour of trading.

The CMA has provisional concerns that the merger could lead to a substantial lessening of competition at both a national and local level. The combined impact means that people could lose out right across the UK and that the deal could also cost shoppers through reduced competition in particular areas where Sainsbury’s and Asda stores overlap. 

Stuart McIntosh, chairman of the independent inquiry group carrying out the investigation, said: “These are two of the biggest supermarkets in the UK, with millions of people purchasing their products and services every day.

“We have provisionally found that, should the two merge, shoppers could face higher prices, reduced quality and choice, and a poorer overall shopping experience across the UK. We also have concerns that prices could rise at a large number of their petrol stations.

“These are our provisional findings, however, and the companies and others now have the opportunity to respond to the analysis we’ve set out today. It’s our responsibility to carry out a thorough assessment of the deal to make sure that the sector remains competitive and shoppers don’t lose out.”

As well as concerns for people shopping in their stores, the CMA is concerned the merger could drive up prices and reduce the quality of service for online customers.

It also believes the deal could lead to inflated fuel costs at more than 100 locations where Sainsbury’s and Asda petrol stations overlap.

The CMA has set out potential options for addressing its provisional concerns. These include blocking the deal or requiring the merging companies to sell off a significant number of stores and other assets –  potentially including one of the Sainsbury’s or Asda brands – to recreate the competitive rivalry lost through the merger. The CMA’s current view is that it is likely to be difficult for the companies to address the concerns it has identified.

The CMA now welcomes responses from interested parties to its provisional findings by 13 March and its notice of possible remedies by 6 March. The CMA’s final report will be issued by 30 April.

Sainsbury’s chief executive Mike Coupe said he was disappointed with the CMA’s announcement and it would be contested.

“The CMA have fundamentally moved the goal posts, not only that they’ve changed the shape of the ball and chosen a completely different playing field. This is a massive problem for any business that might be considering a transaction in the UK,” he said.

“Customers are the main losers. We believe we’d be able to lower prices in the UK market. We’ve made that case very strongly to the CMA and they’ve completely dismissed our evidence.”

He said Sainsbury’s has 800 convenience stores, Asda 61, Tesco 2,000 and Booker 5,000. “The CMA are saying we’d have to sell all of the 61 Asda stores,” he said, while the Tesco Booker deal did not require such divestments.

In a statement, Sainsbury’s added: “We fundamentally disagree with the provisional findings. These misunderstand how people shop in the UK today and the intensity of competition in the grocery market. The CMA has moved the goalposts and its analysis is inconsistent with comparable cases.

“Combining Sainsbury’s and Asda would create significant cost savings which would allow us to lower prices. Despite the savings being independently reviewed by two separate industry specialists, the CMA has chosen to discount them as benefits.

We are surprised that the CMA would choose to reject the opportunity to put money directly into customers’ pockets, particularly at this time of economic uncertainty.

We will be working to understand the rationale behind these findings and will continue to make our case in the coming weeks.”

Market reaction

John Colley, professor of practice at Warwick Business School, said: “The CMA is right to raise concerns about a merger between Sainsbury’s and Asda. It would turn the UK grocery market into an effective duopoly with 58 per cent of all groceries sold through two competitors.

“Asda Sainsbury’s would have 31 per cent of the market and Tesco 27 per cent. Morrisons has 11 per cent, while Aldi and Lidl have just 13 per cent between them. The remainder is highly fragmented.

“Sainsbury’s desperately needs this merger, as its value offering to customers is continuing to lose share in the current market. It is simply too expensive for its range and service. One suspects they will go through with the merger whatever cost is inflicted on them by the CMA as they appear to have no plan B.




“Equally Asda is more price sensitive than some of its rivals and has been hit harder by competition from budget supermarkets Aldi and Lidl.

“Yesterday it posted its latest results, which showed reduced growth, and warned of a turbulent year ahead, but the timing seems very convenient just ahead of the CMA’s provisional findings. Perhaps it was trying to help the merger along.

“It shouldn’t make any difference. The CMA makes decisions based on what is best for the consumer – whether they will get better prices or they will lose choice.

“How does this merger benefit the consumer? Choice will be reduced as there will be only one major competitor and the market is already highly competitive as Aldi and Lidl offer low prices, which the big four either have to meet, or offer better value in terms of range, quality, and service.

“Major savings through the merger in terms of reduced overheads, buying prices, and store closures will not be passed onto consumers unless there is a major change in the competitive landscape. This seems unlikely as it is not clear than Amazon are going to enter the grocery market with any substance.

“Everyone, rich or poor, has to buy groceries, so the CMA’s final decision will affect everyone. However, it seems the only major beneficiaries of this merger would be the Asda Sainsbury’s shareholders.”

Russ Mould, investment director at AJ Bell, said:“It was always going to be a tough battle to convince the competition watchdog that merging two of country’s biggest supermarket chains would be a good idea.

“To see such resistance from the CMA at this stage in its review would suggest there is little chance of Sainsbury’s and Asda coming together.

“The language used in the CMA’s announcement implies the merger will be blocked.

“It is very hard to see the deal happening when you look at the list of its concerns including a worse experience for shoppers and a reduction in the range and quality of products.

“Sainsbury’s will no doubt keep fighting, particularly as its own business desperately needs the Asda deal to inject a bit of life into the company.

“One has to wonder whether it is worth bothering with the fight. Management should just give up now and get back to the day job.”



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