Daily Mail

WHY I STILL DON’T BUY IT

- by Alex Brummer CITY EDITOR

THE stock market clearly likes the idea of this mega-merger. Yesterday, shares in Sainsbury’s – Britain’s oldest establishe­d grocery chain – rocketed after it unveiled its plan for a deal with Asda to create a £14.1billion grocery colossus.

Sainsbury’s chief executive Mike Coupe, architect of the deal, wants to win consumer support with the promise of ‘lower prices by 10 per cent on many of the products customers buy regularly’.

If you believe his reasoning – and the deal is accepted by the monopolies watchdog the Competitio­n and Markets Authority (CMA), as well as the supermarke­t ombudsman – then customers can expect to see a price drop in some key value items. But nothing about this transactio­n is a foregone conclusion.

under the refreshed leadership of the forensic former chairman of the Treasury select committee, Andrew Tyrie, the CMA is not going to give Sainsbury’s or Asda an easy ride.

In these pages yesterday, I argued that the deal was misguided because it could limit choice and convenienc­e for customers. And as the financial details of the merger were revealed early yesterday, my phone rang off the hook.

Sainsbury’s most senior executives were clearly fearful that regulators and politician­s will be more concerned about potential harm to consumers and suppliers than with the positive impact for investors.

I was assured by one of the architects of the deal that it must be a ‘win-win’ situation.

Since 85 per cent of what the big grocers buy comes from 100 big suppliers, the deal would give the Sainsbury’s-Asda conglomera­te added muscle in its dealings.

There will doubtless be victories for the grocers as they negotiate with some of the less robust suppliers for lower prices. But the idea that reducing the number of mainstream grocery chains from four to three – Sainsbury’s-Asda, Tesco and Morrisons – will bring about across-the-board lower prices is fantasy economics.

RETAIL industry suppliers have been quick to pour cold water on the idea that prices will easily be driven down. ‘Sainsbury’s and Asda have huge buying power that already provides them with rock bottom prices… many [suppliers] will not be able to deliver,’ warned consultant­s Simon-Kucher.

The Federation of Small Businesses, meanwhile, is concerned the heft of such a giant new firm could lead to misuse of power to coerce small suppliers ‘into accepting unfair contracts and payment terms’.

Knowing my general scepticism about overseas takeovers, a Sainsbury’s boss suggested to me yesterday this was a deal the Daily Mail should welcoming because it will effectivel­y return Asda – the old Associated Dairies – from its ownership by Arkansas-based Walmart back into the British fold.

This is not quite true, however, because Walmart will be the biggest shareholde­r in the new Sainsbury’s-Asda set-up with 42 per cent of the shares and a third of the votes in the company. There is always excitement when a major merger is announced, but experience tells me that when the publicrela­tions machine is running at full tilt, one should never allow spin to outweigh basic economics.

Consumers shouldn’t kid themselves that Sainsbury’s boss Mike Coupe’s 10 per cent price reductions will necessaril­y mean an overall cut in the cost in a shopping basket across the huge range of branded, own label and fresh produce goods offered by the new group.

Other concerns were aired in Parliament yesterday, where MPs expressed fears not only about job security, but also on whether supermarke­ts would close in their areas.

Sainsbury’s says there are no plans to close stores, but the company will seek ‘operationa­l efficienci­es’ of £500million – which will surely result in job losses in the long run. The thinking is that, if there are only Sainsbury’s and Asda stores in a given area, they could effectivel­y operate a monopoly and so one would have to be sold off to a rival supermarke­t chain.

Analysis suggests that, as a result of such overlap, as many as 75 Asda stores will have to be disposed of if this merger is to have any chance of winning approval.

Such a large divestment could undermine the financial rationale for the deal, and could take years to complete at a time when the whole retail sector is under stress. It is suggested that the new merged company will seek to keep the Sainsbury and Asda brands separate, with the former maintainin­g its focus on quality, and Asda continuing to push cheaper own-brand products which will compete with the upstart discounter­s like lidl and Aldi.

BUT Sainsbury’s tried this with Dutch discounter Netto, and ended up losing £20million after having to close a series of stores where the brands had been sited together.

largely the brainchild of Mike Coupe at Sainsbury’s and his excolleagu­e Dave Cheesewrig­ht at Asda, this merger has been two years in the making. Both firms have been trying to figure out how to deal with the huge global threat from Amazon, which arguably has the best logistics, warehousin­g and delivery technology, as well as almost unlimited financial resources.

Amazon is challengin­g Asda owner Walmart in the US with the purchase of bricks-and-mortar retail firm Whole Foods Market, and starting to make incursions in the UK, too. Sainsbury’s argues it is in a strong position to integrate Asda because both companies have embraced the best of new technology.

Be that as it may, we should heed the lessons of last week’s disastrous IT meltdown at the TSB – that technologi­cal change can be chaotic if companies get it wrong.

Sainsbury’s is still digesting IT and distributi­on changes that came with the purchase of Argos owner Home Retail Group two years ago.

The Sainsbury’s-Asda merger gives the impression of being a sensible deal designed to create a new leader in British shopping. But like many big mergers, it is a roll of the dice designed in part to cover-up grave shortcomin­gs in the strategy of the management­s concerned.

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