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May 09, 2018

Mergers, mergers everywhere

by Mary Anne FitzGerald - Client Services Director

Mergers, mergers everywhere

The Competition and Markets Authority (CMA) is certainly having a busy year. The ink on its approvals of the £3.7bn Tesco/Booker and the £137.5m Co-op/Nisa deals is barely dry. Now Sainsbury's and Asda are the latest retailers expressing their intention to tie the knot. And, 14 years after the £3bn coming together of Morrisons and Safeway, this is a real whopper. 

The proposed £15 billion mega merger was leaked days before it was due to be announced in conjunction with Sainsbury's annual results on 2nd May. A bombshell for sure, but perhaps not altogether surprising and driven in no small part by the ascendancy of the discounters and Tesco.

Asda has struggled to combat the threat of the discounters and has been unable to close the price gap despite widespread re-structures and cost cutting. Also, as the UK retailer would not be able to sustain offering up dividends indefinitely to the ever hungry Walmart, a step change was inevitable.

As for Sainsbury's, although the acquisition of Argos with its same day delivery service (which is bigger than Amazon) has been a great success, it too has been struggling to compete on food and drink prices. Add to this the Tesco/Booker merger and it has dropped back further in scale. 

In the case of this merger, size really does matter. If the deal goes ahead it will give 'Asdainsbury's' annual revenues of £51bn and a market share of 32%, at last overtaking Tesco’s 28%. It will also give them greater purchasing power plus access to Walmart’s further buying clout. 

Anything between 75 and 200 of the group’s 2,800 stores will probably have to be disposed of once the CMA gets its teeth into the numbers. This goes against the pledge made by Sainsbury's Chief Executive Mike Coupe to maintain store and staff numbers. At the moment, there are no plans to close Asda HQ in Leeds and the separate fascias will remain which would appear to make sense.

Sainsbury's is strong in the south, but weak in the north, Scotland and Wales where Asda is the reverse. There is a north south divide that the new combi could bridge with what Coupe has described as the ‘truly remarkable complementality (sic) of the store portfolios’. Add to this the fact that the two have different shopper and consumer profiles. Perhaps between them, they can appeal to an audience which is not only larger but broader than that of Tesco.

So to the impact on suppliers. Once again, size has a significant bearing. Sainsbury's wants to save £500m by tapping into buying ‘synergies’. £75m to come from the integration of Argos outlets into Asda stores and a similar sum from savings on operational costs and utilities. A predicted £350m of savings will be generated from price ‘harmonisation’. For this read that, whichever retailer buys at the best rate, the same price applies the other retailer too. 

At the moment 85% of products in both supermarkets come from the same 100 suppliers and this is where Coupe is expecting these synergies to come from: ‘Large, multinational suppliers, who make spectacular returns on equity and are very, very profitable. What we are trying to do is to identify synergies from those suppliers and reinvest them in UK customers’. 

All of this is on top of the 10% reduction in prices of ‘many of the products customers buy regularly’ that Sainsbury's has put forward as the most public facing promise of its ‘sharpened proposition’ to date. 

‘We think we will be a force for good, not just in how we compete but in terms of resilience and the capacity to compete on any number of fronts’ said Coupe, before going on to being caught on air singing ‘We’re in the money’.

The CMA has now launched its investigation into the merger and is inviting comments from interested parties until 4th June prior to a formal process. Let's see what the ‘interested parties’ have to say, be they suppliers, consumers, employees, MPs or competitors. 

As one rival retailer CEO said ‘let the games begin’.

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