Shoppers are being promised a 10 per cent cut to grocery prices. Staff are being told there will be no job losses or store closures.
And now, experts are saying the £14.1 billion mega-merger between Sainsbury’s and Asda could hold a hidden boost for investors.
The two big names have performed sluggishly in the face of competition from low- cost rivals Lidl and Aldi and a resurgent Tesco and Morrisons.
But, if their merger goes through, it will create Britain’s biggest supermarket chain, accounting for sales of more than £51 billion a year — or £1 in every £3 spent on groceries in the UK.
Experts are saying the £14.1 billion mega-merger between Sainsbury’s and Asda could hold a hidden boost for investors
Experts say the enlarged group will be able to negotiate better prices with suppliers and save £500 million in running costs.
That should make the company more profitable and enable it to cut prices to attract more customers.
Sainsbury’s also owns Argos, which increasingly has a presence in its stores. These could now pop up in Asda, too, making the two supermarkets even more of a one-stop shop for families.
Sainsbury’s share price shot up 15 per cent on Monday after the news broke. But experts say all the big supermarkets — including Tesco and Morrisons — may become a much better long-term bet if the huge deal goes through.
Leigh Himsworth, manager of the Fidelity UK Opportunities Fund, which invests in Sainsbury’s, says: ‘If you put together the likes of Sainsbury’s, Asda and Argos, that is a pretty powerful beast.
‘In the very short-term, if you’re a Sainsbury’s shareholder, you might want to cash in some of the recent gains. It could take a year for the deal to be sorted out and, in the meantime, maybe the likes of Tesco and Morrisons will make hay.’
If the deal goes ahead, a combined Sainsbury’s and Asda would have a 31.4 per cent share of the UK’s grocery market. By comparison, Tesco has 27.6 per cent and Morrisons has around 10.5 per cent.
But, in March, Tesco moved to secure its future by snapping up foods wholesaler Booker for £4 billion. And analysts now think Co‑op could be a potential target for Morrisons.
Both have made great strides in turning around their once ailing businesses, says Mr Himsworth.
But while experts are confident their big rivals will survive a merger of Sainsbury’s and Asda, they say the smaller firms that supply groceries to the supermarkets will suffer.
Rival? Analysts now think Co‑op could be a potential target for Morrisons
On Monday, when the deal was formally announced, shares tumbled in Cranswick, Bakkavor, Dairy Crest, Greencore and Premier Foods — all of which supply the major supermarkets.
This is because investors are worried the Sainsbury’s deal will give the enlarged group a lot more bargaining power and, therefore, make it able to drive down prices in a sector where profit margins are already thin.
Douglas Scott, manager of the Kames UK Equity Income Fund, says: ‘They say it’s a great deal for customers, a great deal for colleagues, a great deal for suppliers and a great deal for shareholders. I don’t think it is a great deal for suppliers.
‘When you say you are going to save millions of pounds, that has to come from somewhere.
‘Small suppliers will take the hit, not the bigger ones such as Unilever or Nestle.’
For investors who want to take a punt on Sainsbury’s, Darius McDermott, of broker Chelsea Financial Services, would recommend Mr Himsworth’s Fidelity UK Opportunities Fund.
It invests £2.80 in every £100 in Sainsbury’s, but also has money in supermarket suppliers Cranswick and Dairy Crest. It has turned £10,000 into £18,270 in five years.
Another option, according to Mr McDermott, is Invesco Perpetual UK Focus, which has turned £10,000 into £16,730 in five years.
Sainsbury’s is the fifth largest holding, accounting for more than £4 in every £100 of savers’ cash. It also counts Marks & Spencer among its major picks.
Ben Yearsley, of adviser Shore Financial Planning, recommends JO Hambro UK Dynamic for savers who think Morrisons will take advantage of the next 12 to 18 months while the Sainsbury’s/Asda deal completes to strengthen its own position.
It invests £3.94 of every £100 in Morrisons and, in five years, has turned £10,000 into £17,060.
However, Laith Khalaf, of broker Hargreaves Lansdown, is less confident that Tesco and Morrisons can thrive if the merger goes ahead.
He says: ‘This is a pretty big deal. Sainsbury’s and Asda are talking of cutting prices by 10 per cent. It’s not a disaster for the likes of Tesco and Morrisons, but it makes things more challenging for them and raises the prospect that another price war is looming.’
But if you are confident Tesco can compete after the big shake-up, Mr Khalaf tips Artemis Strategic Assets. The fund, which has turned £10,000 into £12,493 in five years, invests nearly £5 in every £100 in Tesco, its third largest pick.
The experts say if you wanted to invest in Asda’s owner, U.S. firm Walmart, your best bet would be to buy a so-called tracker fund that follows the overall rise and fall of the U.S. stock market.
Walmart’s share price has risen 14.5 per cent in the past five years.
One of the most popular U.S. tracker funds is Legal & General U.S. Index, which has turned £10,000 into £20,050 in five years.