Nicholas Carroll
Associate Director - Retail, Nicholas Carroll, has a particular flare for the grocery industry but analyses and writes in-depth reports on a range of UK and European retail markets.

The Competition and Markets Authority (CMA) has released the preliminary findings for its Phase 2 investigation into the merger between Sainsbury’s and Asda, and the report throws serious doubt over the potential for any deal to be included. Nicholas Carroll, Associate Director – Retail at Mintel, discusses the implications.

“These are provisional findings but they cast significant doubts on the deal. They will come as a surprise given the confidence of both sides that the deal would complete. Whilst we were expecting that there would have to be concessions, it was not to this level. Indeed, the key area of conflict identified by the CMA hits right at the heart of both retailers’ operations – namely a significant chunk of the supermarket estate.

“Two particular areas were highlighted by the CMA: the reduced competition in the supermarket and online markets. Based on 2018 data from Mintel, the combined new group would have seen 39% of supermarket shoppers spend the most with it in a typical month, compared to 35% for Tesco. In the online space, based on 2018 data, some 57% of online grocery shoppers would have shopped with the new group compared to 48% at Tesco. Sainsbury’s argues the addition of Asda would have allowed it to drive down prices across the group, but the CMA fundamentally disagrees, believing a reduction in competition could potentially have the opposite effect.

There is no easy remedy to the CMA’s findings. If the areas of overlap were smaller, individual stores could have been picked up by rivals, but there are few that could take on all of the necessary concessions and not also fall under the CMAs parameters for reducing competition. At this level, the deal may no longer be viable for either side anyway.

“Whilst Sainsbury’s and Asda are not giving up on the deal, we must look to the next steps if it is abandoned – especially for Walmart who, in line with its wider international strategy, wants to reduce its holding in Asda either way. It could look to find a private equity bidder or look to float the business. Asda, given its current trading, is a more attractive proposition than it was just two years ago, but any potential buyer would need deep pockets.

“For Sainsbury’s, this may seem like a massive blow in the short term, although it can be argued that in the longer term, it may prove positive for the brand. When the deal was announced, we had reservations: bringing the two together would be extremely difficult, as both chain’s customer profiles are so distinct. If successful, it would fundamentally change both retailers’ positioning. Argos is perhaps the biggest loser if the deal does fall through, as it would have significantly benefited from concessions in Asda.

“This is not the last we have heard of this deal. In reality, the fight for Sainsbury’s has only just begun – but for the deal to succeed, the pair must now effect an almost complete reversal of the CMA’s preliminary findings – a big ask. Ultimately, the CMA has to rule not based on well-intentioned current management goals, but on the longer term impact such a move could have on the sector.