Supermarket merger

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Sainsbury-Asda merger

Sainsbury's and Asda confirm merger plans

Sainsbury's chief executive Mike Coupe, has confirmed that the UK's second and third largest supermarkets - Sainbury's and Asda - plan to merge, with the deal looking to be completed by autumn of 2019.

Talks between Walmart, the owners of Asda, and Sainsbury's had reached an advanced stage over the weekend, with an official announcement made this morning (Monday, April 30th, 2018).

If the estimated £10 bn merger is approved it will position the combined group ahead of Tesco – the long-term market leader – and turn the Big Four into the even bigger Big Three.

Market shares before and after the proposed merger

If approved, the supermarket merger will also be the most significant horizontal merger in the sector since Morrisons acquired Safeway in 2004. Unlike that merger, it is anticipated that the existing brand names will remain - meaning that, from a consumer’s point of view at least, very little will appear to change in the short-term.

However, calls have already been made for an urgent investigation by the CMA, given that what was already a highly concentrated market, even following the entry of the discount stores, will become even more concentrated, with the merged firm possibly becoming a virtual monopoly in certain locations. The merger may further increase barriers to entry into the market, and significantly reduce competition in the long run.

Concerns are also being expressed in terms of the considerable monopsony power that the new supermarket giant will be able to exert over its suppliers, should it wish to do so. Supplier's margins have already been squeezed as the market becomes more concentrated, and the merger can only increase this further. Of course, the CMA will also consider the impact on prices to the consumer, and whether cost savings will be passed on in lower prices.

Former business secretary, Sir Vince Cable, has already called for ‘enforced divestment’ when local competition suffers. The upside for the merged business is that scale economies are likely to reduce costs and increase competitive advantage at a time when price competition drives developments in the sector. There are also likely to be considerable synergies as a direct result of the merger.

However, while it seems almost inevitable, at least in the short to medium term, that job losses will follow as the merged business looks to rationalise its operations, chief executive Mike Coupe has insisted that there are no plans to close stores. It is likely that, even if there is some divestment of stores as a condition imposed by the CMA, it is also likely that the CMA will request that new owners of the divested stores will operate the businesses as 'going concerns'.

Whether the CMA considers the possible impact of Brexit on the grocery sector remains to be seen. One possible benefit of Brexit is that the supermarket chains may be able to source their products more widely and benefit from any new free trade deals while at the same time not being subject to the common external tariff on non-EU imports which is central to the EU Customs Union. Of course, we await news this week on what the UK government's position will be on any new customs arrangements with the EU as Brexit negotiations move forward.

 


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