Su­per­mar­ket merger is a war against space in­vaders

Sains­bury’s move for Asda might of­fer a bold vi­sion of the fu­ture, but comes in re­sponse to a se­ries of press­ing threats, writes Ben Woods

The Sunday Telegraph - Money & Business - - Front page -

Shop­pers like Cather­ine Bur­tle are why two of Bri­tain’s fiercest su­per­mar­ket ri­vals are get­ting into bed to­gether. While she is happy to pop into a “big four” store for the odd in­gre­di­ent, when it comes to her main gro­cery shop, her heart lies else­where.

“I pre­fer to shop at Lidl be­cause it’s so much cheaper, es­pe­cially for fresh pro­duce,” she says out­side an Asda su­per­mar­ket in Lon­don’s Clapham Junc­tion. “I didn’t think it would be good be­fore I ac­tu­ally went in there, but when I did, I re­alised I was miss­ing a trick.”

At 26, she is both the shopper of to­day and the fu­ture. How­ever, win­ning her al­le­giance – and cus­tomers like her – is prov­ing in­creas­ingly dif­fi­cult for the in­dus­try’s big­gest play­ers. This is cer­tainly not lost on Sains­bury’s boss Mike Coupe. As he un­veiled a £15bn merger with Asda last Mon­day, he was quick to point out the fast-ris­ing com­peti­tors and high street strug­glers that make up the fe­ro­ciously com­pet­i­tive re­tail sec­tor.

It was a sober­ing mo­ment, but it was not dwelt upon. Coupe went on to brand the com­bi­na­tion of the two su­per­mar­kets as a “new force in UK re­tail”.

He spun a bold vi­sion for cus­tomers and share­hold­ers, strength­ened by the prospect of two gro­cery stal­warts clam­ber­ing above Tesco, when it came to mar­ket share. If the deal goes ahead, Sains­bury’s, Asda and Tesco would be­come a du­op­oly with around a 60pc share of the to­tal mar­ket. The com­ing to­gether of these two busi­nesses has all the hall­marks of an in­dus­try- defin­ing deal. Ex­cept, the de­ci­sions un­der­pin­ning the move ap­pear less about power and more about weak­ness.

This shock deal comes at a time when both su­per­mar­kets have ceded con­sid­er­able ground to Aldi and Lidl. The Ger­man dis­coun­ters have nearly dou­bled their share of the mar­ket in less than three years to 12.7pc com­bined, notch­ing up im­pres­sive sales growth along the way.

Mean­while, the worry over Ama­zon’s next move con­tin­ues to strike fear into the heart of gro­cery bosses. The US tech gi­ant has al­ready been ratch­et­ing pres­sure through its on­line de­liv­ery ser­vices Pantry, Prime and Fresh.

How­ever, no move proved more fright­en­ing than the sight of Ama­zon push­ing into bricks and mor­tar when it swooped for up­mar­ket food chain Whole Foods. The £10.7bn deal saw it take on around 460 stores across the US, Canada and the UK – and it may not end there.

Ama­zon Go, the firm’s re­tail con­cept in Seattle that al­lows cus­tomers to pick up prod­ucts and exit the store with­out the need to pay at the check­out, sug­gests a fur­ther in­cur­sion may not be far away.

In the face of this chal­lenge, Sains­bury’s and Asda are div­ing into one an­other’s trenches in an at­tempt to pro­vide a united front.

The logic is that one su­per­mar­ket of scale is bet­ter equipped than two to tackle the chal­lenge at hand.

By bring­ing to­gether Sains­bury’s power in the South and Asda’s strong­hold in the North, the com­bined com­pany would be able to fight tooth and nail for cus­tomers across the lion’s share of UK post­codes.

It will also hand the two su­per­mar­kets greater buy­ing power, al­low­ing them to be com­pet­i­tive by de­liv­er­ing 10pc price cuts on ev­ery­day items.

But how much does size mat­ter in an in­dus­try where in­no­va­tion, a fleet-of-foot strat­egy and con­ve­nience shop­ping are cap­tur­ing cus­tomers? Shore Cap­i­tal an­a­lyst Clive Black said the smaller play­ers were prov­ing that scale is not ev­ery­thing.

“If it was all about scale, Wal­mart, Car­refour and Tesco, which were the three largest food-based re­tail­ers in the world 10 years ago, would now be even more dom­i­nant,” Black says. “Each of those busi­nesses fell over. What that teaches us is that scale is rel­e­vant, but what is much more po­tent and en­dur­ing is ca­pa­bil­ity.

“If you take this decade, it is smaller re­tail­ers that have been suc­cess­ful. It has been Aldi, Lidl, Ice­land to a

de­gree, Marks & Spencer and Waitrose that all gained mar­ket share.

“The big four re­tail­ers have lost mar­ket share un­til re­cently when Mor­risons and Tesco sta­bilised.

“In­creas­ingly, peo­ple are bored of in­cum­bent cor­po­rate re­tail­ers. They go on­line for some­thing dif­fer­ent or, if they can, somewhere where there is some in­di­vid­u­al­ity.”

For Sains­bury’s and

Asda, this deal is about more than just de­fence. They are promis­ing brighter prospects for sup­pli­ers, staff, in­vestors and cus­tomers alike.

To achieve this, they plan to push through £500m per year of sav­ings, the ma­jor­ity of which come from ne­go­ti­at­ing bet­ter terms with sup­pli­ers. Sains­bury’s has been quick to point out that most of the two su­per­mar­kets’ sup­pli­ers are multi­na­tional – like Unilever and Proc­ter & Gam­ble – which can af­ford to take the hit. It also be­lieves sup­pli­ers will win from the deal be­cause they will ben­e­fit from economies of scale.

How­ever, one sup­plier is un­nerved by the ram­i­fi­ca­tions of the deal. It said: “They might start off play­ing nicely, but at the end of the day you have to change the shape of the mar­ket­place, that is the worry. You’ll have two play­ers with phe­nom­e­nal pur­chas­ing power. There will be in­ter­na­tional sup­pli­ers of branded goods that feel they are big enough, but all the smaller UK and Euro­pean sup­pli­ers will cer­tainly see a con­cen­tra­tion of buy­ing power, which gives them cause for con­cern.”

The pic­ture for staff is also less rosy than the two su­per­mar­kets may present. De­spite Sains­bury’s and Asda promis­ing no in-store job losses, peo­ple are among su­per­mar­kets’ big­gest costs.

The deal will see a du­pli­ca­tion of roles, sug­gest­ing cuts are likely to back-of­fice func­tions. Will there be a need to have a sep­a­rate bis­cuit buyer for Asda and for Sains­bury’s once the tie-up has been pushed through?

Re­duc­ing some back-of­fice staff may go some way to ex­plain­ing the £75m of op­er­a­tional cost ef­fi­cien­cies they ex­pect to find.

How­ever, chief among the con­cerns fac­ing Coupe will be the back­ing of the com­pe­ti­tion watch­dog.

The fo­cus of a po­ten­tial probe by the Com­pe­ti­tion and Mar­kets Au­thor­ity (CMA) is likely to cen­tre on how the su­per­mar­kets’ two sets of stores over­lap at a lo­cal level.

Anal­y­sis by The Sun­day Tele­graph showed that more than one in 10 of the stores owned by the two com­pa­nies – or 65 – are close enough to prompt con­cerns. While the su­per­mar­kets have been adamant no stores will close, dis­pos­als look a likely prospect if the tie-up is to sat­isfy the CMA.

How­ever, in an era where big box su­per­mar­kets are no longer in vogue, will they find enough will­ing buy­ers?

A source at a lead­ing UK su­per­mar­ket said “it was not a rac­ing cer­tainty” that they will see a suf­fi­cient ap­petite for their stores.

Mor­risons has been touted as the most likely suitor, but ques­tion marks re­main over Aldi and Lidl’s in­ter­est given they op­er­ate from much smaller sites. Mean­while, dis­counter B&M may be deemed in­el­i­gi­ble to bid be­cause it is not classed as a su­per­mar­ket.

Whether the deal gets over the line or not, the merger may only be the start of fur­ther con­sol­i­da­tion for the in­dus­try over the next 10 years.

While Wal­mart will emerge as the big­gest share­holder in the com­bined com­pany with a 41pc stake, many ex­pect the US gi­ant to beat a steady re­treat from UK shores as it switches fo­cus to­wards Asia and mount­ing a de­fence against Ama­zon on home soil.

Phil Dor­rell, man­ag­ing part­ner of con­sul­tants Re­tail Rem­edy, is an­tic­i­pat­ing fur­ther deals and sig­nif­i­cant store cut-backs over the next decade, as gro­cers pro­tect their mar­gins.

“The dis­coun­ters will still be grow­ing [in 10 years’ time],” Dor­rell says. “They will prob­a­bly top out at 18pc mar­ket share be­fore they com­pletely run out of steam. Wal­mart will be gone and will have taken all their cap­i­tal back.

“Sains­bury’s will feel the need to have ac­quired some­thing else – like a prof­itable fash­ion brand – be­cause some of the ar­eas they are trad­ing in are not mak­ing enough mar­gin.

“Ev­ery­body will re­duce the amount of stores that they have. The re­tail sec­tor as a whole will shrink mas­sively, while there will be an ac­cel­er­a­tion to­wards an on­line of­fer.”

Dor­rell even ques­tions whether the Asda brand will sur­vive. “What her­itage does the Asda brand carry for Sains­bury’s? I am not sure it has a mas­sive her­itage that they need to keep.”

‘Peo­ple are bored of the in­cum­bent cor­po­rate re­tail­ers. They go on­line for some­thing dif­fer­ent’

‘The re­tail sec­tor as a whole will shrink mas­sively, while there will be an ac­cel­er­a­tion to­wards an on­line of­fer’

Mike Coupe, the boss of Sains­bury’s, left, has told share­hold­ers the deal would bring about a ‘new force in UK re­tail’

Re­tail wars: the ma­jor gro­cery play­ers are hav­ing to fight off a string of dis­coun­ters, and the ever-present threat of on­line

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