This week’s ruling by the Competition and Markets Authority (CMA) wasn’t altogether surprising in expressing reservations about the proposed tie-up between Walmart-owned Asda and Sainsbury's.
There had been widespread speculation that the regulator would impose conditions on any terms where there was significant overlap where both parties had a significant presence, and this is certainly true in this case, as well as being a nice bonanza for all the bankers, lawyers and senior management.
It’s no secret that Walmart has been trying to offload its stake in Asda, and having seen the CMA rubber stamp the Tesco-Booker deal, Sainsbury’s boss Mike Coupe perhaps felt there was an opportunity to consolidate Sainsbury’s position as the number two supermarket in the UK behind Tesco.
For several years now the big four supermarkets have seen their market share nibbled away at aggressively by the young upstarts from Lidl and Aldi, who between them have managed to grow their combined market share into double-digit percentages, while it can only be a matter of time before Amazon starts to make further inroads into the sector.
This merely serves to highlight how competitive the UK food retail sector is, and will likely continue to be in the months and years ahead, as consumers become less brand loyal, and much more price sensitive.
In light of these changes in consumer patterns it does rather call into question as to how the CMA arrived at its conclusions with respect to highlighting its concerns around the merger.
For instance, you can certainly be sceptical at Sainsbury’s claims that the merger will help drive prices down by 10% and benefit customers, but the reasons given by the CMA for coming out against the merger don’t really stand up to scrutiny, and certainly aren’t consistent with their recent decision to rubber stamp the Booker-Tesco tie up.
The claim that the merger could lead to a worse experience for in-store and online shoppers across the UK, through higher prices, and lower quality, along with higher prices at Sainsbury's and Asda petrol stations, comes across as an improbable outcome, given it flies in the face of how the food retail sector has seen margins get compressed in recent years.
Quite frankly that particular conclusion stretches their credibility to breaking point, that they might consider that Sainsbury’s, which to all intents and purposes is a well-run business, and a pension fund staple, might go down that route.
It is true that in some areas there is significant store overlap between the two in terms of discounting and price matching and this may well have been an area of concern but given the future growth plans of Aldi and Lidl it is an unwise business that risks upsetting its customers in such a way that ultimately sends them elsewhere.
For a start its hardly a sustainable business model, something that a lot of retailers have found to their cost in recent years, particularly since Amazon is increasingly look for further opportunities to get into the food retail sector.
If the ruling had made reference to concerns about suppliers getting squeezed then perhaps there may have been slightly more credibility behind this week’s ruling. It is certainly something that suppliers have themselves expressed significant relief about in terms of their own margins, that the merger is now unlikely to happen.
While one can certainly be sceptical of Sainsbury’s claims of lower prices for shoppers it is also hard not to have some sympathy with Sainsbury’s CEO Mike Coupe’s claims that the CMA have moved the goalposts, given that they appear to have applied different rules to the Tesco deal last summer and this one now.
In a sense Mike Coupe didn’t help himself with the now infamous “we’re in the money” clip that went viral in the aftermath of the original bid, nonetheless he would be best advised to dust himself down and move on, given that here appears very little likelihood that the CMA will materially change its ruling, in a way that the deal can go ahead. He should rather focus on improving the business he already has and delivering value there and put this setback down to experience.
After all the rejection can’t have been too much of a surprise, even if the reasoning for the decision wasn’t quite as expected.
As for the regulator it would be helpful if they adopted a consistent set of rules when it comes to assessing deals of this nature in the future, as well as making sure that the reasons for their ruling also stand up to scrutiny.
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Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
