The proposed merger between Sainsbury’s and Asda could result in a “substantial lessening of competition” in almost 500 locations, the competition watchdog has warned.

The Competition and Markets Authority said in its findings from an initial phase one investigation into the merger that the combination of the two businesses would result in a “realistic prospect of a substantial lessening of competition” in 463 areas across the UK.

The CMA has launched an in-depth phase two investigation into the merger of Britain’s second and third-largest supermarket chains.

It will assess whether shoppers could face higher prices or a lower quality of service in locations where Sainsbury’s and Asda both have stores.

The two grocers shocked the retail industry in May when they revealed they had agreed to merge in a £13bn deal.

But the tie-up will face huge scrutiny before it can go ahead – and Sainsbury’s boss Mike Coupe has previously admitted that “extreme scenarios” of remedies from the CMA could force it to pull the plug on the deal.

Sainsbury’s and Asda said in a joint statement: “We welcome the start of the phase two process. The grocery market has changed significantly in the last decade and is more competitive than ever, with the rise of discount formats, online grocery and food delivery businesses.

“We look forward to working with the CMA on the phase two inquiry, where we expect it to conduct a full review of the market and take these changed market dynamics into consideration.

“Customers will be the big winners from this combination. By bringing the two businesses together, we will be able to invest further in more convenient ways of shopping while lowering prices and reducing the cost of living for millions of UK households.”