Monday, 30 April 2018

A Deal Too Far

For all their faults, the Mail newspapers have never quite lost their paleocon side. Alex Brummer writes: 

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 per cent grocery market share — it looks far less seductive. 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. With a 15.8 per cent share of the UK grocery market, Sainsbury’s meanwhile, under Mike ‘Cut-price’ Coupe, has struggled to keep up with market leader Tesco. The latter has a stonking 27.6 per cent share — enhanced this year by its £3.7 billion takeover of Booker, Britain’s largest food wholesaler. 

Sainsbury’s sought to challenge Tesco’s domination by moving into consumer electronics, toys and other goods via its takeover of Argos and its well-established, digital and home delivery service. 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.

Yes, there will be opportunities for economies of scale by joining up head offices, warehouse and logistics systems, and far greater bargaining power with suppliers. This, it is said, will enable the merged ‘super super-market’ to offer shoppers a better deal. 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.

Claims that a fast-changing marketplace demands this merger to meet the Aldi-Lidl challenge must be taken with a pinch of salt. Admittedly, the recent growth in market share for Aldi and Lidl, from virtually nothing to 12.6 per cent, has surprised everyone and surpassed expectations. Competing with them is difficult for domestic supermarkets because so little is known about the economics of the secretive, privately owned German companies now sweeping across Europe. 

As for newcomer Amazon, its fresh food delivery is in its infancy in the UK. It has a lot of catching up to do to match Ocado, Tesco, and Sainsbury’s — all of which have embraced the online world. Sainsbury’s has 276,000 online deliveries a week, against 225,000 by Asda.

Whatever investors decide about the merger, it cannot go through without detailed investigation by the Competition and Markets Authority regulator. In the past when the CMA found competition would be substantially reduced, it demanded the sell-off of stores so that no single supermarket dominates an area. But that fails to address the bigger issues of bargaining power with suppliers. It also fails to determine whether consumers have maximum choice and access to the most competitive prices.

The City and investment community likes deals done and dusted quickly so fees and profits can be taken. That cannot be acceptable in the grocery market where price, choice and convenience must be the overwhelming criteria for the greater public good.

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