Sainsbury’s merger with Asda dealt ‘mortal blow’ by CMA

The proposed merger between two of the UK’s largest supermarkets is on the rocks after the CMA said it found “extensive competition concerns” that Sainsbury’s and Asda were unlikely to be able to resolve.

Publishing its provisional findings this morning ahead of a final decision in April, the CMA said the proposed merger would result in “a substantial lessening of competition at both a national and local level”, with the likelihood of prices being pushed up and quality and choice reduced.

Stuart Mcintosh, chair of the independent inquiry group carrying out the investigation, said this would lead to a “worse experience for in-store and online shoppers across the UK”.

Although he underlined that the findings were provisional and the companies and others now had the opportunity to respond, the CMA also stated its current view that it was “likely to be difficult” for the two retailers to address the concerns it had identified.

One option to recreate the competitive rivalry lost through the merger could be to require the merging companies to sell off a significant number of stores and other assets, it said – potentially including one of the Sainsbury’s or Asda brands – it said.

“These are 2 of the biggest supermarkets in the UK, with millions of people purchasing their products and services every day,” he said. “It’s our responsibility to carry out a thorough assessment of the deal to make sure that the sector remains competitive and shoppers don’t lose out.”

Sainsbury’s and Asda hit back, issuing a joint-statement that said the findings “fundamentally misunderstand how people shop in the UK today and the intensity of competition in the grocery market”.

It claimed the CMA has “moved the goalposts” and provided an inconsistent analysis with comparable cases, ignoring the benefit of synching the two retailer’s costs.

“Combining Sainsbury’s and Asda would create significant cost savings, which would allow us to lower prices,” it reiterated. “We are surprised that the CMA would choose to reject the opportunity to put money directly into customers’ pockets, particularly at this time of economic uncertainty.”

“We will be working to understand the rationale behind these findings and will continue to press our case in the coming weeks.”

Shore Capital analyst Clive Black said the CMA’s decision seemed to have dealt a “mortal blow” to the proposed merger and that Sainsbury’s reading of the decision was “bordering on laughable”.

“We always felt that 10% price cuts on unspecified products on an unspecified timeframe was playing to the galleries. Sainsbury looks like it has misunderstood the consumer and the CMA,” he said.

“For Sainsbury’s we see this as a major blow and one that removes the merger’s premium.”

The Food & Drink Federation welcomed the finding, saying it reflected the concerns of its members that the proposed merger would cause a “substantial lessening of competition at both a national and local level” and an ever more consolidated grocery market.

However Neil Parish, chair of the government’s Environment, Food & Rural Affairs Committee, said he was disappointed the report had only looked at competition on a customer level and had not reflected the impact the merger could have on businesses in the retailers’ supply chains.

“We sent a letter to the CMA last year, asking them to consider supplier views. We know that businesses working in the food industry already face intense pressure due the uncertainty of Brexit and planning for a no deal scenario,” he said, adding that the EFRA Committee would be watching the next steps of this investigation “closely”.

The deal, which was announced last April, would have seen Sainsbury’s become a subsidiary of Walmart and create a combined group worth around £13.2 billion that could transform the UK’s grocery market’s landscape by knocking Tesco off its top spot, according to KantarWorldpanel analyst Fraser McKevitt.

The retailers had initially planned to maintain both the Sainsbury’s and Asda brands and combine their network of 2,800 Sainsbury’s, Asda and Argos (a subsidiary of Sainsbury’s) stores.