Does a Sainsbury’s/Asda combo have the right type of muscle for the 2020s?

The UK’s second and third largest retailers are, regulator permitting, set to become one.

Article updated: 30 April 2018 12:00pm Author: Michael Baxter

So, between them, they will have a 31.4 per cent market share, eclipsing Tesco as the UK’s market leader.

Err, except that after the merger they may choose to close some stores, or the regulator may force them to. According to Kantar, Sainsbury’s has a 15.8 per cent share of the grocery market, Asda 15.6 per cent, while Tesco has 27.6 per cent.

I don’t understand why some are questioning whether the deal should go ahead. The resulting behemoth would have no greater market share than that enjoyed by Tesco a few years ago, so if a Sainsbury’s/Asda beast is considered too big, why hasn’t Tesco been broken up? Besides, regulators waved the merger between Tesco and Booker through, they would struggle to justify stopping this one.

Not seamless, but not too hard

No merger of this size would be trouble free, but there are reasons to think it will be quite smooth. Assuming regulators allow it, then the resulting company will probably be headed by the current Sainsbury’s boss, former Asda man, Mike Coupe, with the Asda boss, ex Sainsbury’s man, Roger Burnley, the number two. Besides, the two stores target slightly different demographics and are each stronger in different regions of the UK.

Rationale

The rationale for such a coming together is that the stores want more muscle to take on the threat of Aldi and Lidl, and the expected threat from a certain US company from Seattle.

Walmart

The deal would also represent Walmart, not so much throwing in the towel in the UK, but certainly taking a back-seat. Just as Tesco was unable to translate its winning formulae into the US, it seems Walmart has struggled to do the same, although without the disastrous results experienced by Tesco. Walmart has owned Asda since 1999, by no means a disastrous foray into the UK, but during this period the store was left eating dust next to Tesco. It is thought that Walmart will retain a stake in the new company.

Bigger issue

But there is a bigger issue here. This is not just about competition from the budget grocers, the real threat is coming from online, in particular Amazon.

Sainsbury’s has tried to grapple with this threat through the takeover of Argos.

But earlier this year, when Sainsbury’s announced is latest trading numbers for the last quarter of 2017, it said that sales at Argos had been falling.

Do two negatives make a plus?

I see a deeper problem for the two supermarkets and wonder how their merger will fix it.
Amazon casts a shadow, one they seem ill prepared to deal with.

Amazon leads the way in technologies such as AI analysing market data, and in delivery technology, such as drones.

What Sainsbury’s and Asda need is more advanced AI, and investments in drone tech.
Maybe, together, with such massive economies of scale, they will be able to justify the necessary investment.

But I can’t help but feel that Sainsbury’s needs to be merging with a big data tech company, or a tech logistics/transport company, not a retailer that faces almost exactly the same challenges.

Over the last five years, the Sainsbury’s share price is down by just over a third, Tesco is down by a little more, Morrisons is down by about 19 per cent, while Walmart has risen modestly. By contrast, Amazon is up around 600 per cent.

The grocers need to be less concerned with what each other are doing, and instead focus on the bigger story.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.