Walk down the aisle
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”.