OPINION: Sainsbury's - Asda merger could be very good news for Derry shoppers
The proposed Â£15 billion deal, to merge supermarket giants Sainsbury's and Asda, boosted the former's share price by 16 per cent following the surprise announcement on April 30.
The shareholders were happy, but what is in it for the customers?
According to Sainsbury’s boss, Mike Coupe, the big attraction will be: “A 10 per cent reduction in prices of many products that customers buy most regularly.”
He also predicted: “There will be no store closures and no job losses.”
Retail experts found both predictions to be vague and lacking in credibility.
Forecasting a potential £500 million boost in profitability for the new entity, was the part of his announcement that the shareholders wanted to hear.
The promise of price reductions for shoppers, however, was very much for the ears of the Competition and Markets Authority (CMA), which will now have approximately three months to consider the merger application. It will have to be convinced that the proposal does not create a monopoly or stifle competition and that it will yield easy-to-identify (and permanent) benefits for the customer.
Many analysts are not that surprised at the announcement.
Northern Ireland retail expert, Donald Mc Fetridge, believes it may well be the first of many. He suggests that, in recent years, there have been moves to develop ‘pan-European’ retail ‘supergroups,’ involving Carrefour in France and Albert Heijn in the Netherlands.
Today, with German brand, Lidl starting to impact on the market share of the three biggest ‘players,’ Tesco, Sainsbury’s and Asda, Europe’s influence on the Northern Ireland grocery business has already begun.
Donald Mc Fetridge is sceptical that the planned merger could be achieved without pain.
Indeed, he holds the view that store closures and job cuts are inevitable.
If the CMA concludes that ‘local’ monopolies exist – as is likely in some locations, Derry is fortunate, in that without an Asda (within 14 miles) there should be no question of a ‘local’ monopoly. However, where the two supermarket ‘giants’ exist side-by-side, questions will be asked.
The problem with any company merger is that it is more about long-term survival, than about wanting to ease the pressure on consumer ‘wallets.’
It’s more about market share ratings and satisfying shareholder demands.
This proposed merger is clearly designed to deal with the resurgent Tesco, the imminent threat of Amazon’s arrival into the sector and the growing popularity of the ‘discounters’ Lidl and Aldi. (It is only a matter of time before Aldi opens in Northern Ireland.)
According to the latest research from Kantar Worldpanel, Tesco is once again Northern Ireland’s dominant force in the grocery sector.
At 35 per cent market share (50 stores) it still beats the combined Sainsbury’s-Asda total of 34 per cent (31 stores).
Although, Asda is currently ‘sitting’ on a number of successful planning applications, it will be interesting to see if the company proceeds with any of them. It’s decision to allow planning approval at Homebase on the Waterside’s Crescent Link to lapse, is interesting.
Asda’s owner, the mighty Walmart, recently declared that: “It is not in the UK to invest material amounts of capital,” a reference to its earlier revised strategy on store expansion. It now intends putting its valuable capital into the merger instead, where it can save substantially on administration, distribution and general logistic costs.
Asda’s considerable buying power will be particularly attractive to Sainsbury’s, as Mike Coupe well knows – he used to work for Asda!
Some experts are concerned that the promise of price cuts will be at the expense of the suppliers. Simran Jagdev, companies analyst at ‘The Economist’ Intelligence Unit, believes that lower prices at the till will be funded by some of the already ‘squeezed’ supply chains, operating on the most meagre of profit margins.
On this occasion, Derry is probably fortunate not to have an Asda alongside the established Sainsbury’s. The CMA would view that in a negative light and painful decisions would inevitably have to be made.
If the merger is approved, the likely evolution would be the gradual infiltration of Asda’s pricing policy into a ‘chunk’ of the Sainsbury’s business model.
It should mean lower prices across a broad range of popular items.
A recent survey of prices in a typical shopping basket revealed that customers saw a 7 per cent saving in their Asda purchases, as compared to Sainsbury’s. That is an encouraging starting point upon which to develop the proposed merger. The promise of a 10 per cent reduction in prices for the long term will be pivotal in the CMA’s consideration of the merger application.
German discounters, Lidl and Aldi responded aggressively to the merger announcement and the price promise – saying defiantly that they “will remain the cheapest option on the high street.”
Reliable survey data regularly does show that the German discounters are up to 30 per cent cheaper than the established supermarket giants, on a range of almost identical products.
At just 6 per cent of the share of the Northern Ireland market and in expansion mode, Lidl alone represents a growing threat, over the longer term, to the bigger supermarket names.
In Derry, Lidl is planning a much larger store on the Buncrana Road, which will add to the competition facing the more dominant Sainsbury’s. This should be good news for Derry shoppers.
On the day of the big announcement, the new boss of the proposed Sainsbury’s/ Asda conglomerate, Mike Coupe, was overheard singing: “we’re in the money,” while waiting to do a radio interview.
The question for the CMA is exactly who is ‘going to be in the money,’ when and if the merger is approved?
If the authority is doing its job properly, it should be the shopper – first and foremost.
Preserving jobs and stores may prove to be a different story.