Analysts and unions have questioned how Sainsbury’s boss Mike Coupe can promise that no stores will close following the merger with Asda that will create a £14.1billion supermarket behemoth.
After ‘advanced’ merger discussions were confirmed yesterday, Sainsbury’s shares shot up nearly 20 per cent while the likes of Morrison’s and Tesco floundered as the future of the traditional ‘Big Four’ grocery giants was thrown up in the air.
Regulators will be ready to pounce on such a big, game-changing deal that would create a firm of some 330,000 employees, controlling nearly a third of the British groceries market.
Will the deal manage to get the go-ahead from the Competition and Markets Authority and what will it mean for the supermarket sector and shoppers if it does?
It is only right the merger is scrutinised given there would be some 330,000 employees and thousands of stores affected
No one is in any doubt as to the logic behind Sainsbury’s plan to combine forces with Walmart-owned Asda.
It makes a lot of sense in an industry where new market entrants such as Aldi and Lidl are slowly eroding away its traditional customer base, and where the big hitters such as Tesco have dominated a quarter of the market for years.
Helal Miah, investment research analyst at The Share Centre, said the move offered cost savings and a boost to buying power.
‘It addresses the group’s geographical weakness in the north and keeping the two brands separate offers the diversification benefits of being exposed to two segments of the market, with Asda occupying the lower-priced, value end of the market,’ he said.
Miah added: ‘This is useful at times of price and income pressures faced by consumers while Sainsbury’s exposure to the middle and higher quality segment of the market where margins could improve in better times.’
With this move the combined group would have a hefty 31.4 per cent share of the total UK grocery market, outstripping Tesco (27.6 per cent) by a significant margin.
Asda has lost its position as a discount supermarket after the rise of Aldi and Lidl
For Asda the combined group would help shield it from the big discounters that have slowly stripped away its reputation as a store offering rock-bottom prices.
The merger could even lead to the bargain European brands pulling back from their longer-term growth aspirations in the UK.
Moody’s vice president and senior credit officer David Beadle said: ‘We still believe that continued store openings will help the combined market share of Aldi and Lidl reach 15 per cent by 2020 from 12.6 per cent now.
‘However, the tougher competitive environment after this transaction could result in one or both of these discounters curbing their longer term growth aspirations in the UK.’
Sainsbury’s boss Mike Coupe (pictured) has insisted no stores will close and no jobs will be lost
Tesco, on the other hand, looks fairly well placed to weather the next few years.
Beadle adds: ‘Our outlook for the credit quality of Tesco and Morrison during the next 12-18 months remains unchanged.
‘During this period we expect Tesco to make further operational progress and for its credit quality, which has improved markedly during the past year, to continue to strengthen.’
There is even talk that other brands, namely the Co-operative Group and Morrison’s could consider their own deal or merger to tackle the fast-changing retail landscape.
With Tesco’s recent merger with Booker getting the nod from the CMA, the precedent for further supermarket mergers has been set – though perhaps with some more conditions thrown into the mix.
The mergers of big supermarkets has left the door open for others to follow suit with the Cooperative Group and Morrison’s tipped as potential partners
Sainsbury’s claim that no stores will close as a result of the merger and that no jobs will be lost has been widely sniffed at.
Union boss Tim Roache, the GMB general secretary, has said hundreds of thousands of workers will be affected.
He said: ‘They all know such announcements tend to be followed by management speak like “rationalisation” in the name of “efficiency”.
‘What that usually means is job losses or cuts to pay, terms and conditions which would be wholly unacceptable.’
The chance to merge head offices and scale back on salary costs is one of the attractions of these deals, doing more and making more for a lot less.
Yet Sainsbury’s boss Mike Coupe has insisted this time it will be different. Only time will tell if the CMA sees the situation a little differently when looking at the impact it will have on shoppers.
The job of the CMA is to make sure competition and choice for consumers is not hit by any merger.
Analyst research has found there are 197 Asda stores that are within the same postcode district as a large Sainsbury’s, excluding Sainsbury’s Local stores, which could feasibly be at risk from a closure if the CMA sees consumer choice being restricted.
Patrick O’Brien, UK retail research director at GlobalData, the group behind the initial research, said: ‘Looking at it by the smaller postcode sector (the first half of the postcode plus the first digit of the second half), 75 Asda stores have a Sainsbury’s, excluding Locals, in the same sector.
‘We think these 75 stores would be the absolute minimum that the CMA will want disposed of.’
The 75 stores in the ‘red zone’ would likely be closed in the event of any merger, analyst say
Peel Hunt head of research Charles Hall agreed and said: ‘While the Sainsbury’s/Asda merger might look good on paper, we see no chance of it getting through the CMA without a major dismemberment of the combined business.’
Sainsbury’s may have the best of intentions, or could be keeping their fingers crossed that the CMA ‘forces’ its hand into store closures, but it is sure to be a move that transforms the grocery landscape no matter what.
Independent retail analyst Nick Bubb said the entire merger would have been ‘unthinkable’ a couple of years ago.
He added: ‘The bizarre decision last year by the CMA to give the Tesco/Booker deal the go-ahead without any divestments inevitably opened the path to more sector consolidation.
‘We therefore think that there’s a pretty good chance the CMA will allow the merger to proceed in the end, but there will be a lot of arguing about local catchment overlaps, and the main debate is how many stores Sainsbury’s/Asda will have to promise to sell to placate the CMA.’
Without the precedent of the Tesco/Booker merger perhaps the future for Sainsbury’s and Asda would look bleaker, but most agree the CMA will give the merger a thumbs up – but it doesn’t mean there will not be casualties along the way.