The CMA has blocked the proposed merger between big-four titans Sainsbury’s and Asda, saying the union would cause a ’substantial lessening of competition’ in UK grocery. What does its verdict mean for the future of the sector?
The writing has been on the wall for the proposed merger of Sainsbury’s and Asda since the Competition and Market Authority (CMA) unveiled “extensive competition concerns” in its provisional findings on the merger in February, which included an eye-watering 629 local markets across the UK where the combination could create a “substantial lessening of competition”.
Despite pledges by the two grocers to sell 150 supermarkets and invest £1bn in price cuts in a bid to appease the authority since then, the CMA was unmoved in its final verdict today.
“There is no effective way of addressing our concerns, other than to block the merger”
Stuart McIntosh, CMA
The inquiry group’s chair Stuart McIntosh says: “It’s our responsibility to protect the millions of people who shop at Sainsbury’s and Asda every week. Following our in-depth investigation, we have found this deal would lead to increased prices, reduced quality and choice of products, or a poorer shopping experience for all of their UK shoppers.
“We have concluded that there is no effective way of addressing our concerns, other than to block the merger.”
But what does this verdict mean for the future of mergers and acquisitions in grocery?
GlobalData UK research director Patrick O’Brien says: “What it points to is little opportunity for much more consolidation in the UK grocery market.
“It does open the door to the idea that certain assets could be bought by an outside investment vehicle or outside retailer and obviously, there’s always the whole opening the door to Amazon – but I don’t think Amazon really has any designs on taking on a great chunk of physical space in the UK grocery market. There’s the potential, though, for other retailers or private equity to get involved, as there doesn’t look like there’s going to be much consolidation from within.”
PwC director of retail strategy Kien Tan believes the CMA’s verdict demonstrates a misunderstanding of the growing size of the grocery market and the increasingly diverse set of retailers that shoppers visit to fill their fridges.
“This verdict very clearly knocks on the head the idea that anybody could buy anybody else between core, store-based grocery retailers,” he says.
“The reality is, regardless of this ruling, we’ve got too much grocery square footage in the UK, not just because of online but because people shop differently. There needs to be a change in thinking and adjustment in square footage by the big four, and that will happen with or without the CMA.”
One former grocery executive agrees the verdict will make it much harder for existing grocery players to adapt to the changing market quickly enough to remain relevant in the years to come.
“More material consolidation will need to happen for certain grocers to better compete through lower prices and survive in the longer term”
Former grocery executive
He says: “The UK grocery market is arguably changing quicker than any market in world retail. For the established players to compete with the threat of Aldi and Lidl and the growth on online grocery shopping, businesses have to change and adapt.”
“We’re seeing various partnerships like Marks & Spencer-Ocado, but more material consolidation will need to happen for certain grocers to better compete through lower prices and survive in the longer term. The CMA’s ruling has made it much more difficult for that to happen and you wonder what that might mean for the shape of the market 10 years down the line. I’m not sure the CMA has really considered that properly.”
However, Clive Black, head of research at Morrisons’ house broker Shore Capital, believes the CMA has made the right decision in blocking the Sainsbury’s-Asda merger.
“The CMA has put down a marker – M&A activity needs to be better thought through and much more considered,” he says.
“The CMA has set out its stall that, for any merger or acquisition, there needs to be a demonstrable benefit for shoppers. What it doesn’t do is rule out such organisational change further down the league table among players with smaller market shares. And what would happen if Amazon decides to bid for one of the major UK grocers?
“But in this instance, the CMA has done its job. We have been one of the biggest critics of the CMA in recent years, but this is about looking at where prices will be in five to 10 years, not tomorrow.”
A political decision?
One industry analyst argues that despite the CMA’s reasoning for its verdict, its decision was, at heart, politically motivated.
“The CMA needs to prove it has teeth and isn’t in the hands of big business, and retail is a good sector to do that with because it is very visible,” he says.
He adds that, if approved, the deal could have landed the authority in hot water because it could have been perceived by shoppers as “the CMA rubber-stamping a deal which could lead to… store closures, job losses and farmers being paid a penny less for their milk”. This could lead to blame being levied at the CMA, and ultimately the government, for such outcomes.
“Why would you spend the money and time on putting a deal together now that you’ve seen this?”
The analyst believes none of these events will be avoided by Sainsbury’s and Asda failing to merge and are part of the inevitable changes taking place in grocery due to the increasing number of players in the market and the rise of online shopping.
“The CMA’s raison d’etre is to protect the consumer – but I think if it had worked with the two businesses and allowed the merger with good caveats and remedies it would protect the consumer no worse than it has by pigeonholing two weakened standalone businesses,” he says.
He adds that the CMA’s verdict could also have more worrying and long-term implications at a time where retailers need to explore new models and routes to market to drive growth.
“Why would you spend the money and time on putting a deal together now that you’ve seen this?” he asks.
Regardless of the CMA’s motivations for shutting down the Sainsbury’s-Asda tie-up, it has arguably set a precedent that could straitjacket innovation and collaboration in UK retail for years to come.
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