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
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