CMA threatens to scupper Sainsbury's-Asda deal

22 February 2019 Consultancy.uk

The UK’s competition watchdog has said it will oppose a multi-billion merger between two of the UK’s largest supermarkets on the grounds it will lead to price increases and a reduction in choice. Sainsbury’s and Asda had been lining up a deal to join forces as they come under pressure from new challengers such as Aldi and Lidl.

Supermarkets saw a net opening of eight new stores in 2018. While that sounds small, in the context of a UK retail sector which saw a net closure of 1,123 stores – the equivalent of 14 per day – it becomes clear that grocers are one of just a few subsectors which have not been a significant victim of a major downturn on British high-streets. A potent blend of spiralling debts, climbing business rates, and a weakened pound caused multiple casualties in the British retail scene; but while consumers can scale back on dining out, for example, to tighten their belts, food at home remains essential, so supermarkets have continued growing.

With that in mind, the UK’s competition watchdog, the Competition and Markets Authority (CMA) has said it could block a £13.2 billion merger between Sainsbury’s and Asda, on the grounds it will hit consumers hard. The CMA may alternatively force the sale of a large number of stores or even one of the brand names attached to the two supermarkets, if they intend to pursue the merger further. With two of the market’s ‘Big Four’ joining forces, the CMA said it was concerned that customers would face higher prices and less choice thanks to the deal.

According to the BBC, a deal to conjoin Asda and Sainsbury’s would create the UK's biggest supermarket chain, a business accounting for £1 in every £3 spent on groceries, and enjoying a 31.4% market share with 2,800 stores at its disposal. The move would be a significant escalation in the 'Battle for Britain' against German discount grocers Lidl and Aldi, who have been eating into the market share of the Big Four for some time.

All of the top supermarkets of the UK have been engaged in stringent cuts to see off the challengers. This has seen Sainsbury’s reduce its national workforce by thousands over the last two years, while Asda attempted to raise funds from suppliers in order to cut in-store prices. That move quickly came under fire from the Groceries Code Adjudicator (GCA), which condemned the as not being respectful of “fair dealing” policy. Despite reducing costs clearly being at the forefront of both brand’s minds while they discussed their potential merger, the CMA still said it believed the deal would lead to price rises.

Stuart McIntosh, chair of the CMA's independent inquiry group, remarked, "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 found] very significant competition concerns in a number of areas – they are to do with grocery shopping in supermarkets, grocery shopping online and the companies' petrol stations. However, if one recognises that the competition concerns are quite broadly based... putting together a package of measures which addresses those concerns is likely to be complex and quite challenging.”

Commenting to the BBC, Sainsbury's Chief Executive described the watchdog’s findings as "outrageous". Mike Coupe added that the CMA's analysis was "fundamentally flawed" before stating Sainsbury’s would be making "very strong representations" to it about its "inaccuracy and lack of objectivity."

Coupe concluded, "They have fundamentally moved the goalposts, changed the shape of the ball and chosen a different playing field. This is totally outrageous."