The UK's Competition and Markets Authority cast the planned Sainsbury's-Asda merger in doubt this morning, with the watchdog stating that it has ‘extensive competition concerns’ about the planned deal.
Sainsbury's and Asda have since issued a statement noting that the CMA's findings ‘fundamentally misunderstand' the modern grocery industry, accusing the watchdog of 'moving the goalposts'.
Here's how leading retail analysts viewed the CMA's announcement.
Russ Mould, AJ Bell
“It was always going to be a tough battle to convince the competition watchdog that merging two of country’s biggest supermarket chains would be a good idea. To see such resistance from the CMA at this stage in its review would suggest there is little chance of Sainsbury’s and Asda coming together.
"The language used in the CMA’s announcement implies the merger will be blocked. It is very hard to see the deal happening when you look at the list of its concerns, including a worse experience for shoppers and a reduction in the range and quality of products.
“Sainsbury’s will no doubt keep fighting, particularly as its own business desperately needs the Asda deal to inject a bit of life into the company. One has to wonder whether it is worth bothering with the fight. Management should just give up now and get back to the day job.”
Clive Black, Shore Capital
"Whilst we need to see if Sainsbury and Asda can argue and legally challenge the CMA’s findings, the deal looks to have suffered a mortal blow. The CMA struggles to see how remedies can deliver its view of a competitive UK market.
"Indeed, Sainsbury’s angry reaction to the CMA’s announcements, which we need to read in detail, reflects the mood, but also perhaps is a little detached.
"We believe it is bordering on laughable for the group to state, ‘We are surprised that the CMA would choose to reject the opportunity to put money directly into customers' pockets,’ when we always felt that 10% price cuts on unspecified products on an unspecified time frame was playing to the galleries. Sainsbury looks like it has misunderstood the consumer and the CMA."
Catherine Shuttleworth, Savvy
“Very surprising conclusion reached by the CMA, which doesn’t seem to fit with precedent and fails to take account of the changing shape of the grocery market, in particular, the growing influence of discounters as mass-market businesses.
"The thought that a merged Sainsbury’s/Asda could push up prices is ludicrous in what would remain one of the most competitive grocery markets in the world.”
Bruno Monteyne, Bernstein Research
"The CMA released its provisional findings this morning, and it looks like bad news for [the] SBRY-Asda deal, with close to the worst-possible outcome. The provisional findings state concerns for the worsening of experience in stores and online through higher prices, a poorer shopper experience, and reductions in the range and quality of products offered.
"This is at odds with Sainsbury's stated significant gross synergy price investments they promised at the offset of the merger, and the company has issued [a] rebuttal to these findings.
"The CMA will be accepting responses from interested parties by 13 March and its notice of possible remedies by 6 March. Final report to be issued on 30 April, as before – [an] eight-week extension. Whilst these are provisional findings and it gives Sainsbury's/Asda (and other stakeholders) an opportunity to respond, neither options laid out by the CMA seem particularly rosy."
Richard Lim, Retail Economics
"These provisional findings deliver a hammer blow to the potential tie-up between Sainsbury's and Asda. Protecting the interests of consumers is paramount, and the CMA chose not to mix its words, with the second phase finding extensive competition concerns. The scope of any potential recommendations in the final stage may be too much to swallow for the deal to survive.
"There's no doubt that the industry is amid a painful readjustment. Competition in the industry is fiercer than ever before, and at the heart of this proposed deal is the need to drive further efficiencies through scale. What emerges between whom and when remains highly uncertain, but we expect plentiful conversations between retailers and wholesalers, wholesalers and symbols groups, and even large-scale logistics companies."
Richard Curry, Rapleys
"The CMA’s provisional findings do increase the likelihood of the Sainsbury’s-Asda deal being scrapped. However, Walmart will clearly still be looking to offload Asda, and there will likely be other suitors waiting in the wings. The left-field but potentially realistic option is Amazon. Clearly, the online juggernaut is looking at its UK strategy, with the launch of its first cashier-less Amazon Go store outside of the US in London.
"With its Whole Foods business going strong, there could be a surprise splash around the corner. The irony, of course, is that Walmart is seeking to offload Asda as part of its domestic strategy to see off competition from Amazon. By consolidating its position at home, Walmart could cede ground to Amazon internationally.
"Clearly, Sainsbury’s will robustly defend the proposed deal. The CMA have extended the deadline for its final decision to the end of May, but this could drag on far longer if there is any appeal. The challenge for Sainsbury’s is that Walmart may feel a better outcome can be found elsewhere, which the CMA will doubtless welcome as a solution, given the complexities it is trying to navigate."
Patrick O’Brien, GlobalData
“The CMA’s provisional findings on the proposed merger of ASDA and Sainsbury’s have devastated any prospect of the merger going ahead. Rather than just point to a number of stores that would need to be divested, as had been expected, the CMA has raised concerns about the tie-up in just about every conceivable way – on national and local grounds, on store and online competition concerns, and on major stores, convenience stores and petrol stations. The CMA even outlined how difficult the required level of divestments needed would be to action.
“While Sainsbury’s CEO Mike Coupe vows to fight on, this may be because he cannot concede without losing face. The confidence he placed in getting the deal past the CMA in light of its previous – generous – decision to allow Tesco to buy Booker looks like a bad misjudgement now, and recent results have seen Sainsbury’s fall behind its rivals, inviting the suggestion that management have taken their eye off the ball.”
Barclays European Food Retail Equity Research
"Although the CMA might conceivably be persuaded to think differently by the time of the CMA’s final report, our central assumption would be that this is unlikely to happen. We therefore assume that the proposed merger will have to be abandoned – even though Sainsbury and ASDA may not openly accept the inevitability of that outcome at this stage.
"We think that blockage by the CMA would have been considered a very pessimistic outcome at one point – last summer, we struggled to find many investors who doubted that the proposed merger would be passed by the CMA. However, today’s development perhaps comes as less of a surprise [...] after the public disagreement on the timelines of the merger investigation between Sainsbury/ASDA and the CMA in December. Ultimately, we believe that last night’s closing share price still discounted a certain percentage likelihood that the merger would come to fruition.
"If, indeed, the proposed merger ultimately fails, then it will be interesting to see whether ASDA remains as a Walmart subsidiary, or whether its parent company pursues alternative approaches. There have been recent press reports suggesting that private equity might have interest in ASDA if the proposed merger failed to complete."
© 2019 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: European Supermarket Magazine.
