Walk down the aisle

Financial Mail - - SHOP TALK - @zeenat­moorad mooradz@bdlive.co.za

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The UK gro­cery mar­ket is no­to­ri­ously cut-throat, and the war of the su­per­mar­kets took a dra­matic turn a week ago when Sains­bury’s an­nounced a £7.3bn takeover of Wal­mart-owned Asda. This will be a mar­riage of Bri­tain’s sec­ond- and third­largest gro­cers.

Con­sol­i­da­tion is to be ex­pected, given that Ger­man dis­coun­ters Aldi and Lidl con­tinue to gain mar­ket share and e-com­merce gi­ant Ama­zon (through Ama­zonfresh and Whole Foods) is dig­ging its heels in.

The pro­posed deal will re­sult in 2,800 stores with sales of £51bn and a work­force of roughly 330,000. Two sep­a­rate brands will still ex­ist — Asda is more mid­dle ground while Sains­bury’s is slightly up­mar­ket.

Whichever way you look at it, the merger is a spec­tac­u­lar and gamechang­ing cre­ation of a du­op­oly in the UK gro­cery mar­ket.

Mar­ket-leader Tesco, which has a 27.6% mar­ket share, will be de­throned as the new en­tity be­comes the UK’S largest re­tailer. Sains­bury’s mar­ket share stands at close to 16% and

Asda’s at 15.5%.

A decade ago, the Ger­man dis­coun­ters had about 4% of the mar­ket — now they have nearly 13%.

Aldi and Lidl, through their cut­price model, have changed the buy­ing habits of UK con­sumers to fo­cus more on search­ing for value. When the Ger­man brands first en­tered the mar­ket they were seen as an op­tion for thrifty I’m over­sim­pli­fy­ing a bit but here it is: Sains­bury’s is strug­gling to dis­count as deeply as Aldi, Lidl and even a re­fo­cused Tesco (since its turn­around and tie-up with whole­saler Booker). In fact, it just re­ported its slow­est pace of growth for more than a year. Scale will give it more mus­cle to ne­go­ti­ate with sup­pli­ers and sales per square me­tre will likely im­prove if it adds more branches of Ar­gos, its cat­a­logue re­tail sub­sidiary, into Asda stores.

Wal­mart bought Asda in 1999 and the ac­qui­si­tion has been, well, dis­ap­point­ing. Asda’s share of the mar­ket has, for the large part, re­mained static, with Wal­mart’s much-hailed buy­ing power not count­ing for much.

The pro­posed merger could cut prices across the new group by 10%, which is sig­nif­i­cant. Syn­er­gies could gen­er­ate about £500m in cost sav­ings through the usual kind of stuff, such as pur­chas­ing and dis­tri­bu­tion. Wal­mart gets al­most £3bn in cash and 42% of the com­bined busi­ness in re­turn for sell­ing Asda.

There are two things to point out. First, the deal will al­most cer­tainly face scru­tiny from the UK’S com­pe­ti­tion & mar­kets au­thor­ity as well as politi­cians — par­tic­u­larly around store clo­sures. Glob­aldata es­ti­mates that at least 75 of Asda’s 584 stores will have to be shut­tered.

Sec­ond, Sains­bury’s boss Mike Coupe, while wait­ing in an ITV stu­dio for an in­ter­view on the day the merger was an­nounced, was caught on camera qui­etly singing to him­self. The song — from the mu­si­cal 42nd Street

— was “We’re in the Money”.

I’ll say.

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