Tougher regulation? Examining the regulator’s reasons for blocking the Sainsbury’s-Asda merger

30 Apr 2019 --- It’s game over for Sainsbury’s and Asda merger plans. As the two UK supermarkets try to move on from last week’s crushing news that their tie-up has been stopped in its tracks, questions are being raised over whether this underscores a tougher approach for businesses in terms of receiving UK regulatory approvals. From the get-go, many believed such a mega-merger would be hard to get past regulators and the 500+-page final report from the UK Competition and Markets Authority (CMA) has now been published and details exactly what happened.

As is common when a giant tie-up is on the cards, companies often divest, sell-off and make other post-merger commitments to persuade the authorities that their merger is the right choice. 

The supermarket chains tried to allay the CMA’s serious concerns by promising divestments and claiming post-merger, shoppers would benefit from no less than £1bn (US$1.3bn) worth of “everyday savings.” However, this was not enough and after initially criticizing the CMA’s investigation earlier this year, claiming it was “moving the goal posts and “fundamentally misunderstanding how people shop in the UK today,” over the last few days Sainsbury’s, Walmart and Asda have mutually agreed to terminate the transaction as a result of the CMA blocking the deal.

It’s a year ago to the day (April 30, 2018), that Sainsbury’s and Walmart announced the proposed combination of the Parties. Sainsbury’s would acquire Asda from Walmart and, in turn, Walmart would receive shares in Sainsbury’s, such that Walmart would hold 42 percent of the shares (and 29.9 percent of the voting shares) in the merged entity. Walmart would also appoint two non-executive directors to the Board.

That was the plan. 

While insisting there would not be store closures and job losses, Sainsbury’s and Asda thought they were on track. But the CMA’s “extensive competition concerns” remained and even grew as the planned merger would have permanently reshaped the UK grocery market to create ‎a more powerful rival to Tesco, the UK’s current retail leader. The UK regulator firmly believes a merger of this magnitude would lead to increased prices in stores and online and was not swayed in the slightest by any concessions coming from either of the supermarkets. 

What happened with the CMA’s final report?
The CMA’s investigation into the proposed merger was a detailed and wide-ranging one. It conducted three large surveys of customers covering in-store groceries, online delivered groceries and fuel, through which it received the detailed views of more than 60,000 shoppers.

In addition to conducting hearings with Sainsbury’s and Asda, the CMA also conducted a roundtable in Edinburgh and held hearings with a broad range of supermarket suppliers, the parties’ competitors, trade and consumer bodies, and other interested parties. The regulator visited both supermarkets’ head offices and store locations. The CMA reviewed hundreds of thousands of internal documents and examined thousands of pages of submissions from the retailers and other interested parties.

Sainsbury’s operates a network of 1,428 grocery stores (including 647 supermarkets and 781 convenience stores), 314 petrol filling stations (PFSs) and an online grocery business. Sainsbury’s also operates retailers Argos and Habitat. Asda operates a network of 641 grocery stores (including 582 supermarkets and 59 convenience stores which are all attached to PFSs), 33 Asda Living stores (focused on non-grocery products including clothing), 321 PFSs and an online grocery business. 

The CMA’s approach was to assess the likely effects of the proposed merger in five areas, including in-store groceries; online delivered groceries; general merchandise; fuel; and buyer power. That is, whether the increased power of the merged entity over suppliers would distort competition and result in adverse effects for customers of grocery retailers.

According to the CMA’s final report, UK grocery retailing is an important industry which was estimated to be worth approximately £190 billion (US$245 billion) in 2018. Food and non-alcoholic drinks represent around 11 percent of typical household expenditure, increasing to over 14 percent for those on lower incomes. It has been estimated that groceries account for just over half of all retail sales in the UK.

Taking in-store and online sales together, Tesco is the largest grocery retailer in the UK, accounting for around 27 percent of grocery sales. Sainsbury’s is the next largest, accounting for approximately 15 percent, followed by Asda (14 percent), Morrisons (10 percent), Aldi (7 percent), Co-op (6 percent), Lidl and Waitrose (each 5 percent), Marks & Spencer (4 percent), Iceland (2 percent) and Ocado (1 percent).

Growth of the discounters
One of the developments in the UK groceries sector in recent years has been the growth of the so-called “discounters” such as Aldi and Lidl, which have challenged the so-called “Big 4” grocery retailers (Tesco, Sainsbury’s, Asda and Morrisons) and other traditional grocery retailers, says the report. 

More than 500 Aldi and Lidl stores have been opened across Britain since 2010, taking them to a total of around 1,500. The discounters tend to stock around one-fifteenth of the different product lines of a large “Big 4” supermarket and they offer fewer branded goods. The CMS says that its analysis confirms that discounters are now an important presence in the market.

Little and often 
Another trend, says the CMA, is that people are increasingly shopping “little and often,” with the traditional “big weekly shop being much less common than it used to be.” 

“However, this is a gradual and long-established trend and large supermarkets remain important for most customers who still conduct a single main weekly shop. Both Tesco and Sainsbury’s now operate substantial numbers of convenience stores. Asda only operates a relatively small number of convenience stores, all of which are attached to its PFSs,” the report highlights. 

“There has also been continued growth in online delivered groceries in the UK with revenues of around £11.4 billion (US$14.7 billion) in 2018. This is now around 6 percent of UK groceries sales. While many in-store grocery retailers also supply online delivered groceries, Aldi and Lidl do not, and a few retailers such as Ocado operate online only,” it says. 

The CMA’s assessment was extremely in-depth – the final report is more than 500 pages and it took more than one year to complete – and it ultimately finds that the proposed merger lessens competition. 

“Where the merger lessens competition in local areas representing a significant proportion of the Parties’ overall supermarkets, the merger may result in price rises (and/or a worsening of other aspects) across all the parties’ stores,” it says. The effect could be a worse deal for customers in each local area where one or more of the Parties is present (that is, including areas where they do not overlap). Any such deterioration across the Parties’ stores as a whole would reflect the aggregate effect of the loss in the competitive constraints that the Parties face across the local areas where they operate, the report notes.

Despite what the retailers insist would have been “clear customer benefits” of the proposed merger, Asda, its parent Walmart and Sainsbury’s mutually agreed to terminate the transaction following the CMA’s decision. Previously they had accused the regulators of not understanding the market dynamics of the UK grocery sector and claimed to have been treated unfairly. 

“We have been clear from the beginning of the proposed merger about two things. Firstly, that retail is rapidly changing and standing still is not an option, and secondly that we will always ensure our international markets are strong local businesses powered by Walmart,” says Judith McKenna, CEO of Walmart International. 

“The UK remains one of the most competitive retail markets in the world and Asda’s seven consecutive quarters of year-on-year growth show it is a strong business with a clear strategy and focused leadership,” she adds.

“It was against that backdrop that we decided to explore the proposed merger with Sainsbury’s – an opportunity which would have further strengthened the Asda business and delivered real benefits for UK customers.”

“While we’re disappointed by the CMA’s final report and conclusions, our focus now is continuing to position Asda as a strong UK retailer delivering for customers. Walmart will ensure Asda has the resources it needs to achieve that,” she concludes.

Similarly eager to move on, CEO of Asda, Roger Burnley, says that the supermarket was right to explore the potential merger with Sainsbury’s, which would have delivered great benefits for customers and supported the long term.

Asda’s DNA is delivering low prices for hard-working families and that will never change, he says. “We’re disappointed with their (CMA) findings but will continue to find ways to put money back into customer’s pockets and deliver great quality and service in an ever-changing and demanding market.”

“The last year has been an unsettling time for all of our colleagues. Our focus is now on the most important job we all have – delivering for our customers.”

The complexities of retail mergers have been on clear display throughout this particular proposal as Sainsbury’s and Asda have been heavily critical of the CMA’s analysis and approach. But, obviously, the CMA stands by its rejection of the merger saying that, ultimately, it is the right outcome for its consumers in this space. 

By Gaynor Selby