Asda-Sainsbury’s merger: £1bn in price cuts promised as retailers battle to convince competition regulators

20 Mar 2019 --- UK retail giants Sainsbury’s and Asda have pledged £1 billion (US$1.3 billion) in price cuts and grocery savings if they are allowed to merge. Both supermarkets are making big promises in a bid to persuade the UK Competition and Markets Authority (CMA) to rethink its “extensive competition concerns” over the planned merger which would permanently reshape the UK grocery market to create ‎a more powerful rival to Tesco, the UK’s current market leader.

The proposed merger was thrown into doubt earlier this year when the CMA’s in-depth investigation found the tie-up could have an impact on choice and reduce quality. Shoppers would face higher prices and a poorer overall shopping experience across the UK, regulators warned.

But now in an attempt to rescue the merger, a robust rebuttal is being put forward by the two supermarkets who “strongly disagree with the CMA's provisional findings” and claim to have found the CMA's analysis of their proposed merger to “contain significant errors.” It amounts to a big pitch to the CMA to allay competition fears before its final report which is scheduled by the end of April.

Sainsbury’s and Asda claim to be able to create cost savings by securing lower purchasing prices from suppliers, predominantly by paying the lower of the two prices that they currently pay large suppliers for identical products and by jointly buying shared goods and services and reducing central costs. In addition, Argos stores would go into Asda.

Sainsbury’s and Asda’s post-merger commitments include delivering £1 billion (US$1.3 billion) of lower prices annually by the third year post-completion; to invest £300 million (US$396 million) in the first year of the combination and a further £700 million (US$925 million) over the following two years as the cost savings flow through. This would reduce prices by around 10 percent on everyday items, the supermarkets claim. 

Sainsbury’s will also cap its fuel gross profit margin to no more than 3.5 pence per liter for five years while Asda will guarantee its existing fuel pricing strategy.

The price commitments will be independently reviewed by a third party. The parties will publish their performance each year, holding them to public account. 

In addition, Sainsbury’s will move to pay small suppliers within 14 days while Asda will continue to pay its small suppliers within the same time frame, in line with existing commitments.

The two businesses insist that they are proposing to merge so that they “can lower prices for customers in an increasingly competitive market while improving quality and service.”

Sainsbury’s and Asda have given the detail of their estimated £1.6 billion cost savings to the CMA. They claim that this will allow them to fund the £1 billion customer price commitment while also delivering on the commitments to shareholders of £500 million (US$661 million) of net synergies, low double-digit ROIC (return on invested capital) and double-digit EPS accretion by the end of the second full financial year.

The retailers “strongly encourage the CMA to recognize that there is a clear benefit to consumers from combining the two companies.”

“We are trying to bring our businesses together so that we can help millions of customers make significant savings on their shopping and their fuel costs, two of their biggest regular outgoings,” says Sainsbury's Chief Executive, Mike Coupe and Asda Chief Executive, Roger Burnley.

“We are committing to reducing prices by £1 billion per year by the third year which would reduce prices by around 10 percent on everyday items. We are happy to be held to account for delivering on this commitment and to have our performance independently reviewed and to publish this annually.”

“We hope that the CMA will properly take account of the evidence we have presented and correct its errors. We have proposed a reasonable yet conservative remedy package and hope the CMA considers this so that we can deliver the cost savings for customers,” the Chief Executives conclude. 

The CMA’s findings in February dealt a serious blow to Sainsbury’s and Asda’s plan, and now they hope these post-merger commitments will be enough to spur a change of heart. However, the CMA has already set out potential options for addressing its provisional concerns which include blocking the deal or requiring Sainsbury’s and Asda to sell off a significant number of stores and other assets. 

“The companies and others now have the opportunity to respond to the analysis we’ve set out. It’s our responsibility to carry out a thorough assessment of the deal to make sure that the sector remains competitive and shoppers don’t lose out,” Stuart McIntosh, Chair of the independent inquiry group carrying out the investigation, has previously said. 

The question is now “will the competition regulator be swayed?” 

By Gaynor Selby