The Competition and Markets Authority (CMA) has today confirmed that it is blocking the proposed merger of Sainsbury’s and Asda. The two chains, along with Walmart, have since stated that they are abandoning the deal.
The widely expected decision was outlined in the regulator’s final report from its investigation into the tie-up. As flagged in its provisional findings in February, the CMA stated the deal could lead to shoppers and motorists being worse due to expected price rises, reductions in the quality and range of products available, or a poorer overall shopping experience.
The group of independent CMA panel members concluded that the tie-up would result in a substantial lessening of competition at both a national and local level for people shopping in supermarkets and online. They stated this would mean shoppers right across the UK would be affected, not just in the areas where Sainsbury’s and Asda stores overlap.
In making the decision to prohibit the merger, the CMA said it had reviewed a wide range of issues in detail, such as the increased competition presented by discounters like Lidl and Aldi, and how new or expanding competitors could affect the retail market, including online. However, it stated that these industry developments did not allay its competition concerns about the merger.
It added that it had also reviewed the two companies’ statement they would cut some prices. However, the CMA said its analysis showed that, overall, the merger would reduce competition in the market and is more likely to lead to price rises than price cuts.
Stuart McIntosh, chair of the CMA inquiry group, commented: “It’s our responsibility to protect the millions of people who shop at Sainsbury’s and Asda every week. Following our in-depth investigation, we have found this deal would lead to increased prices, reduced quality and choice of products, or a poorer shopping experience for all of their UK shoppers.
“We have concluded that there is no effective way of addressing our concerns, other than to block the merger.”
Following the release of the CMA’s final report, Sainsbury’s, Walmart and Asda this morning stated that they have “mutually agreed” to terminate the transaction.
Sainsbury’s CEO, Mike Coupe, commented: “The specific reason for wanting to merge was to lower prices for customers. The CMA’s conclusion that we would increase prices post-merger ignores the dynamic and highly competitive nature of the UK grocery market. The CMA is today effectively taking £1bn out of customers’ pockets.”
He added: “Sainsbury’s is a great business and I am confident in our strategy. We are focused on offering our customers great quality, value and service and making shopping with us as convenient as possible.”
Analysts have speculated that Sainsbury’s could face a major shake-up under its new chairman if the merger plan failed. It has been suggested that the first major move by Martin Scicluna will be an overhaul of Sainsbury’s top management team, with Coupe possibly being replaced. He masterminded the deal after nearly two years of secret talks with Asda’s management and owner Walmart.
Investors are said to have been pushing for Sainsbury’s management to cut their losses and walk away from the deal so they can focus their efforts on improving the performance of the core business.
Meanwhile, it has been suggested that a definitive CMA block would supply the catalyst for a sale of Asda by Walmart, with private equity firms the most likely bidders. However, with Asda recovering some momentum after cutting prices and improving its own label ranges, its US owner may decide to recommit to its UK subsidiary.
Judith McKenna, CEO of Walmart’s international division, said it was “disappointed” by the CMA’s decision, adding: “Our focus now is continuing to position Asda as a strong UK retailer delivering for customers. Walmart will ensure Asda has the resources it needs to achieve that.”
Sainsbury’s shares hit a new year-long low this morning on the news, down nearly 5% at 216p.
NAM Implications:
- Way now cleared for Walmart sale of 20-40% of Asda to Private Equity…
- (part of moves by Walmart to partially reduce their holdings outside the US, yet retain participation at country level, see precedent in Brazil)
- Sainsbury’s need to detail Plan B, fast…
Analysts’ Reaction
Mark Jones, partner at law firm Gordons and an expert in the food and drink supply chain, said: “Suppliers will be breathing a sigh of relief with the news the Asda/Sainsbury’s merger is not going through. The CMA said the risk was that customers would face higher prices. Maybe that is true but in the short term, suppliers would have been told that they have to supply the combined business at the lower of the two prices they charge Asda or Sainsbury’s, or possibly provide a new even lower price. That would have been the immediate effect of the merger and, thankfully for suppliers, the CMA has done them a favour.”
Patrick O’Brien, UK Retail Research Director at GlobalData, a leading data and analytics company, offered his view: “The CMA’s decision to block the Sainsbury’s – Asda merger puts the heat on Sainsbury’s CEO Mike Coupe. Whatever the rights or wrongs of the CMA’s decision, he appears to have wasted a year chasing an impossible dream while its competitors took full advantage of its distraction. Its results over the last year have been poor, with store standards falling noticeably, and it must now refocus on retail basics rather than chase another big acquisition.
“One of the key mistakes Coupe made was in failing to offer any assurances on price cuts until the CMA’s devastating provisional findings in February: it built the rationale for the merger on the rather vague notion that it would reduce prices by 10% by putting pressure on major suppliers, though it didn’t make it clear how many products this would include. It only made some assurances of audited price investment later, but this might have had more sway if it had offered them at the start.
“The confidence Coupe placed in getting the deal past the CMA in light of its previous – generous – decision to allow Tesco to buy Booker looks like a bad misjudgement now. Mike Coupe may feel hard done by, but the CMA made clear that the Tesco-Booker deal was passed because it considered the acquisition to be a vertical one, by a retailer of a wholesaler, and so viewed that the combination did not significantly damage the competitiveness of either market. The rights and wrongs of that decision are debateable but it looks difficult for Coupe to argue that the CMA’s decision then is in direct contradiction of its decision regarding Asda/Sainsbury’s now.
“Asda’s performance does not give as much cause for concern as Sainsbury’s, which itself puts more pressure on Coupe. Why has Asda been able to manage the distraction of the merger so much better?
“We do not believe Walmart will want to keep Asda as it is now, and may look to sell Asda to other suitors, but it would look unlikely that other major players in the UK would consider it, given the strictness the CMA has displayed. It opens the possibility of private equity or floating the business, or a foreign retailer entering the market. Amazon will always be speculated about, but we do not believe that taking on a major physical food presence in the UK fits with its strategy, despite the Whole Foods deal in the US, which was a distressed (i.e. cheap) business, more focussed on affluent customers.”
John Perry, managing director of SCALA, a provider of management services for the supply chain and logistics sector, commented: “The big four have been losing market share to the discounters for some time now, and on top of this have the added pressure of global retail giant Amazon entering the grocery sector.
“It therefore seems rather short-sighted that the CMA has blocked the proposed Sainsburys/Asda merger over fears it would reduce competition and therefore raise prices for consumers.
“With competition so rife in this constantly changing sector, it’s actually quite unlikely that this merger would have had any significant impact on the consumer.
“Meanwhile, if Amazon eventually achieves the online dominance in grocery that it has achieved elsewhere, it’s quite possible that in years to come we will look back in dismay at the decline of UK grocery retailers.
“This merger would have given Sainsburys and Asda the opportunity to become more efficient and compete as effectively as possible.
“They could have optimised their network of distribution centres and transport operations, with potentially significant gains through reduced handling and vehicle miles. Stock levels could also have been reduced, reducing warehousing space and capital that is currently tied up in inventory.
“Suppliers could have delivered larger orders into fewer distribution centres, which in turn would have increased consolidation, allowing vehicles to be utilised more efficiently and ultimately reducing vehicle mileage and the associated costs.
“With so much potential for efficiency gains, cost reductions and environmental rewards, all of which ultimately benefit the consumer, the CMA’s decision would suggest that it has fundamentally misunderstood the impact this merger would have had on competition.”
Meanwhile, Paul Harvey, Partner at Newton said: “In terms of the road ahead for Asda and Sainsbury’s, the two have placed a lot of emphasis on this merger. Shoppers may be missing out from today’s announcement, as the synergies of the merger were very real and would have allowed them to invest in price, with a 10% reduction appearing realistic.
“However, the temptation to generate further savings and drive profitability, that might ultimately reduce consumer choice and drive up prices, was seen as too big a risk by the CMA. Opportunities such as combining areas of their range and improving margins through merging data on pricing and promotions would undoubtedly have been on the road map at some point in the future.
“It’s now important that both look at their current businesses and identify areas that can be improved. Even without combining forces, opportunities still exist to work with suppliers to add more value to products and cut unnecessary costs, as well as tackling in-store inefficiencies to lower costs and improve customer service. Both have the scale and capability to claw back some market share against Tesco and the discounters.”
