In a move that has sent waves through UK retail, supermarket giants Asda and Sainsbury’s announced on April 28th that they are in shock talks over a £10bn merger deal. The deal would give the combined Asbury’s (because Sasda doesn’t quite have the same ring) a combined 31.4 per cent market share, compared with Tesco’s 27.6 per cent.
The news may have been an unexpected jolt to wake up to on a Saturday morning, but that might not be the case with the bigger picture.
“The Asda/Sainsbury’s merger shouldn’t come as a huge surprise,” notes Meyar Sheik, CEO of real-time omnichannel personalisation provider Certona. “It’s a safety measure for the brands, with ‘affordability’ having been redefined by Aldi/Lidl and Amazon’s encroachment on the grocery space significantly upping competition. It’s also a win for the supermarkets, with predicted cost savings and operational efficiencies.”
Certainly, cost has been at the forefront of much of the discussion. “The merger with Sainsbury’s is an opportunity to take cost out of the supply chain which they hope the suppliers will fund,” says John Colley, Professor of Practice in the Strategy & International Business group at Warwick Business School. As a result of this cost cutting, Sainsbury’s has promised that customers should see a 10 per cent reduction in the price of their shopping.
While those price cuts may initially seem a good thing for the collective wallets of the nation, Colley says out that the outlook might not be so rosy for consumers: “customers will see reduced choice and the current price war is likely to persist.”
If it’s not down to cost or choice, Terry Hunter, UK managing director of Astound Commerce believes that the most important aspect of the merger may lie in ensuring brand loyalty. “This merger should be seized as an opportunity for both parties to share resources, differentiate its offering, stand out from the crowd, and build/retain a loyal customer base – and this doesn’t mean simply slashing product prices,”.
The strengths of each company, Hunter argues, complement each other very well. “One of Sainsbury’s strengths lies in the fact that it has a strong online offering through its acquisition of Argos in 2016. As well as this, the retailer announced last week that it was expanding its tech team by nearly 25 per cent. This ongoing commitment to expanding its omnichannel offering is interesting and shows an awareness of the threat from across the Atlantic. If the deal goes through, combining Sainsbury’s online strengths with Asda’s large physical stores will be the very definition of an omnichannel approach.”
But while the news may be good for both companies and their never ending war against the market leading Tesco, there are serious questions over what it means in terms of a potential monopoly and for employees.
The former is an issue which has been raised by food campaigners, environmentalists and farmers’ leaders, who believe – as Colley pointed out above – that the promise to cut costs will put pressure on suppliers, many of which may be forced to cut corners. “Too much pressure on producers only increases the risk of shortcuts being taken, including environmental standards being lowered,” says Dan Crossley of the Food Ethics Council”.
More specifically for the tech world, the merging of Sainsbury’s, Argos and Asda under one roof – all of which were competing organisations less than three years ago – has made the budget computing retail space significantly smaller in the UK, and that’s without mentioning the recent fall of Maplin.
The £15 billion deal will face huge scrutiny from the Competition and Markets Authority (CMA), but don’t expect there to be much of a fightback. “The CMA waved through the Tesco-Booker deal and for this deal there is confidence that the price in terms of divestments may well be relatively low,” points out Colley
But perhaps more pressing than even that threat to competition comes in the form of the threat to jobs.
Sainsbury’s and Asda combined employ 360,000 people in the UK, and while the companies initially said that there were no plans for store closures as a result of creating the group comprising 2,800 stores, the story has begun to change.
“There hasn’t been a retail deal like this in more than a decade,” says David Haywood, founder of Maximise UK – who believes that at least 6 per cent (73) of the combined group’s supermarkets are at risk.
Similarly, a union representing Asda staff believes that regulators will force 75 Asda supermarkets and 11 distribution centres to close due to their proximity to Sainsbury’s shops and warehouses. The areas that are likely to be affected the most are the South East (which has 17 overlapping supermarkets) and the North West (with 13 overlapping supermarkets).
“The Competition and Markets Authority will ensure that there are sales of stores where there is overlap which should help Morrison’s and also Aldi and Lidl. However, the large stores may well be viewed as surplus capacity in the industry which no one wants and will subsequently close,” adds Colley.
There is a big fear amongst staff that those closures will result in job losses. GMB national officer Gary Carter told The Mirror: “People are very fearful about their jobs and long-term prospects.
“Asda have said to us they are going to continue as a separate operation and there are no plans for store closures and changes. However, we’re concerned that where there have been mergers and takeovers within the retail sector in the past it has resulted in stores being sold and rationalisation within the distribution and head office functions.”
He concludes that “people want long term job security but it’s likely to be up in the air for quite a long time.”
The proposed deal still has a lot of processes to go through and there will be many more developments before its expected culmination in mid-2019. The merger is being put forward as pro-consumer in the sense of cutting costs and streamlining operations, but the pitfalls that will inevitably arise due to the highlighted loss of choice and variety may ultimately end up being detrimental to the consumer experience.