‘Why I believe the Asda merger goes too far’
City Editor of the Daily Mail, he is an economics commentator and author of seven books and was named Financial Journalist of the Year in 2013.
Will a merger between Asda and Sainsbury’s be good for customers? The supermarkets have promised that grocery prices will fall and there will be no job losses. But can that be true?
The unveiling of a £12 billion mega-merger between Sainsbury’s and Asda has been met with largely unalloyed excitement.
Big deals between household names raise hopes of something different and better for consumers, lower prices, improved returns for investors — and big fees for City advisers (an estimated £100 million here).
But if we strip away the hype and disabuse ourselves of the belief that something good must come of creating a behemoth of the High Street — combined sales of almost £50 billion a year and a 31.4% grocery market share — it looks far less seductive.
The last supermarket merger in the UK, between Morrisons and Safeway, was an unmitigated disaster
I’d go so far as to say this is a deal too far and here is why. First, this is being driven by market weaknesses, not strengths.
Asda is struggling at the lower end of the market, while Sainsbury’s is caught in the middle, under pressure from heavily discounted stores and upmarket outlets.
We know from experience that bringing together two companies facing enormous challenges is never a recipe for success.
The last such supermarket merger in the UK, between Morrisons and Safeway in 2004, was an unmitigated disaster.
It took more than a decade to bed down and for customers to get the benefits they were promised. As for investors, which include all of us through our pension funds and insurance policies, well we’re still awaiting the promised returns.
Second, however you cut it, a merger taking a major competitor off the market can only, in the longer haul, cut competition and choice with no guarantee of lower prices. Instead of the so-called Big Four — Tesco, Asda, Sainsbury’s and Morrisons — we’ll have the Big Three.
The best that can be said is that creating one large ‘middle-of-the-road’ supermarket might create opportunities for rivals with something different: Marks & Spencer and Waitrose at the top end, and the German no-frills interlopers Lidl and Aldi at the cheaper end.
Of course, the proprietors of US-owned Asda (Walmart) and Sainsbury’s (the biggest shareholders are Qatar and Sainsbury family trusts) have good commercial reasons for wanting this deal.
Walmart, the world’s biggest retailer, now views the UK as a problem rather than an opportunity. As well as the Aldi and Lidl effect, consumer disaffection with out-of-town stores and the popularity of online shopping are having an impact.
Bringing Sainsbury’s and Asda, two companies with very different cultures, together, would mean the linked enterprise leapfrogging Tesco as the country’s market leader — hence the variety of grandiose promises for a better future.
But cost-cutting and merging companies that employ almost 350,000 staff in total will be costly and disruptive, and take years to implement with implications for consumers.
And to emphasise, taking a player out of the market — especially Asda, which prides itself on being the most price-conscious among the Big Four — won’t make things better for consumers. That is what monopoly power is all about.
It will also be bad for suppliers, especially British farmers as they seek to adjust to Brexit. A new dominant supermarket chain will have the market power to chisel down the price it pays for fresh produce and ingredients. It will have suppliers over a barrel.
That cannot be acceptable in the grocery market where price, choice and convenience must be the overwhelming criteria for the greater public good.
© Associated Newspapers, reprinted with kind permission
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- £12 billion
- Asda’s owner, Walmart, will receive £3 billion in cash and 42% of the new business. Sainsbury’s is valued at around £6 billion and Asda at around £7.3 billion.
- Big fees
- These would go to various lawyers and advisers involved in negotiating the deal, which experts say could take a year.
- In other words, if the deal goes ahead, £1 in every £3 in British supermarkets would be spent at the new company.
- Farmers are currently paid subsidies from the European Union. The UK government has promised to match these payments for five years after Brexit, but after that the future is uncertain.