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A key decision that could reshape the UK supermarket sector.

Walmart's Sainsbury's-Asda merger faces key decision

Click on the flag for more information about United Kingdom UNITED KINGDOM
Monday, February 11, 2019, 07:00 (GMT + 9)

If the agreement is settled, the combined group will knock Tesco down as the largest supermarket chain in the United Kingdom.

But concerns about whether buyers could face higher prices or fewer options as a result of the linkage have led to the UK competition regulator putting the sector under the microscope.

Sainsbury's and Asda, owned by the US retail giant Walmart, are the second and third largest supermarket chains in the United Kingdom.

Why do companies want to join?

The grocery market in the United Kingdom is fiercely competitive. Sainsbury's and Asda seek to respond to the pressure of discount stores such as Aldi and Lidl, be more competitive against Tesco and be able to face online threats such as the increase in food delivery applications and Amazon.

Richard Lim, executive director of the research consultancy Retail Economics, says that "the biggest driver here is scale." For example, by combining their businesses, companies can push to obtain the lowest prices from suppliers.

The idea is that if a supermarket pays 10p for a can of beans, while the other pays 11p, both supermarkets can now pay the lowest price.

Sainsbury's expects to obtain cost savings of GBP 350 million only with this type of "price harmonization", says Lim.

However, parliamentarians have warned that it would not be easy to get large suppliers to agree to this, which means thousands of small suppliers could be squeezed.

Chief Executive Mike Coupe said Sainsbury's would seek savings from large suppliers, which provide most of their products, instead of squeezing small suppliers.

What will it mean for the food price?

Supermarkets have promised that, as a result of the merger, prices would fall "around 10 percent on many of the products that customers buy regularly."

Lim says that, assuming the Brexit works smoothly, Sainsbury's and Asda could pass the savings to consumers.

However, critics point out that Sainsbury's has not established what products would see declines in price, at what time scale and exactly where the savings will come from.

The detail that Sainsbury's has provided was when Coupe told the Select Committee on Rural Food and Environmental Affairs: "We will lower the prices of everyday items, it is 18 months in the future, it is a very competitive market, it is impossible to speculate exactly what those items will be, but they will be the kind of things people buy week after week: canned tomatoes, pasta."

What will it mean for jobs?

Gary Carter of the GMB union says members are "worried and stressed" due to uncertainty over their positions.

"People do not know what the merger will bring," he says. "We have had many comments from people: 'Will I have a job?', 'Will I be fired?', 'If I have a new job, who will be my new employer?'"

Asda employees are also wondering if they would get a salary parity with colleagues from Sainsbury, who receive higher salaries, he says.

Lim thinks that job losses are inevitable because the two companies combine operations.

"In the end, it is inevitable that there will be fewer people working in the combined unit," he says. "The motivation [for the merger] is reducing costs."

Will companies need to sell stores?

A merger between Sainsbury's and Asda, which plan to keep their brands separate, could create a retail giant with more than 2,800 stores in the United Kingdom.

The Competition and Markets Authority (CMA) initiated an investigation into the proposed agreement in August 2018. It if decides that the merger can continue, it is likely to say that the two retailers must sell a certain number of stores to the competitors.

But the number of stores that must be disposed of and the profitability of those stores will determine if the agreement will be viable.

As part of its investigation, the CMA is analyzing how close Sainsbury's and Asda would compete with each other in stores and online, and whether competition from other retailers would be suppressed.

The scope of the research includes groceries, fuel, toys, electrical goods and children's clothing, and is also analyzing the impact on the power of supermarkets over suppliers.

Once the provisional decision of the CMA has been made, supermarkets and other interested parties can make comments before the final decision, which has a deadline of March 5.

Supermarkets may decide to appeal against the final decision, if it goes against them.

Source: Tom Espiner / Business reporter, BBC News

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