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Thursday, May 23, 2024

New superpower to take on the discounters

The UK’s second and third largest retailers, Sainsbury’s and Asda have announced that they are to join forces in a a £15bn merger, with Sainsbury’s paying almost £3bn in cash to Asda’s parent company, Walmart, along with 42% of the combined business. Experts predict that it will create Britain’s biggest grocer by market share.
All the ‘Big 4” supermarkets have been under increasing pressure from German discounters Lidl and Aldi, who are continuing to take market share, and it’s thought that combining to become the largest UK food retailer will enable Asda and Sainsbury’s to better compete on a buying scale.
Global data analysis expert GlobalData predicts that at least 75 Asda stores could close in the merger with Sainsbury’s, handing market share to Tesco.
UK Retail Research Director at GlobalData, Patrick O’Brien, said: ‘‘We can see why this deal would be attractive to Asda as their low price stance has been undermined by the discounters, and it has been unable to position its brand or customer experience as offering more than the discounters, in the way that Tesco and Morrisons have been able to do, as they never traded on being the cheapest.”
He said fighting the increasing challenge of the discounters will require more than just cost cutting and increasing buying scale.
The Competition and Markets Authority (CMA) will need to be sure that the deal is good for competition.
Patrick said: Our initial research found that while almost half Asda stores had a Sainsbury’s in the same postal district (the first half of the postcode, known as the ‘outcode’), many of these were Sainsbury’s Local stores, which arguably could be excluded as they serve a different shopper mission. Taking these out leaves 197 Asda stores, however this is not definitive as stores in different postcodes can be geographically very close, and some stores in the same postcode district could, feasibly, be far away enough not to be considered competitors. Looking at it by the smaller postcode sector (the first half of the postcode plus the first digit of the second half), 75 Asda stores have a Sainsbury’s (excluding Locals) in the same sector. We think these 75 stores would be the absolute minimum that the CMA will want disposed of.
Newton’s latest research shows that almost half (47%) of shoppers prioritise convenience, while price is only the fourth biggest driver. Sainsbury’s already excels in the convenience and quality stakes, but this merge should also drive prices down – threatening discounters Aldi and Lidl.
Newton’s associate director Paul Harvey says the merger “makes sense”.
“Although the news that Asda and Sainsbury’s plan to merge is significant, Asda was the one major supermarket not to have made a recent move. With Tesco merging with Booker, Sainsbury’s buying Argos and Morrison’s entering into supply deals with McColls and Amazon – Asda needed to improve its position. However, Asda has provided consistent profit for Walmart over the past decade at the expense of longer-term growth, so it makes sense for the group to sell now,” he said.
“In order to find efficiencies and attempt to become 10% more competitive on price, multiple areas of the supply chain will be reviewed. Asda and Sainsbury’s will need to deliver savings through supply chain consolidation – particularly for non-branded products. However, this action combined with their increased buying power is only likely to buy them 2-5% percentage points in their cost of goods. Larger savings will only be made if they are able to combine areas of their product ranges, creating a net reduction in the number of products for an individual supplier and a decrease in the total number of suppliers. Even then, these changes are only likely to bring them in line with the likes of Tesco – which still leaves Lidl and Aldi in a unique position.”

  • The next edition of FMCG News will feature a number of industry responses to the news in its regular “Question Time” feature.

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