News of the end of the engagement is confirmed… By Dr. Clive Black

April 25, 2019 2:07 pm
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The Competition and Markets Authority did not believe that Sainsbury and Asda had become charitable organisations with the sole aim of cutting the grocery shopping bills of the British.

Sacre bleur!

How could the regulator possibly not see that and so supposedly believe that the prime motives behind the proposed merger was to masque the deteriorating trading position of Sainsbury’s Supermarkets and to allow Wal-Mart to exit the UK? In doing so how could that self-same regulator also believe that a duopoly in the British grocery market could in time raise prices? Look at the example of other domestic monopolies…, banks, telecoms, trains and utilities, what’s the problem?

“…..there is probably a sense of relief that the merger is not taking place with the supply base.”

The analysis of the whys and wherefores of this now doomed merger will be debated for some time one senses but what could it mean for the British grocery supply chain?

Well, at first base there is probably a sense of relief that the merger is not taking place with the supply base. Such an emotion will have been felt firstly by international brand owners, who were the prime initial source for synergies from the combination, and then by domestic players, who were thrown into the mix once the provisional findings were released in February and Sainsbury and Asda clamoured to demonstrate £1bn+ of price cuts.

Whilst so, it is important to note that the CMA has acted because it does not believe that a more concentrated industry is in the shoppers’ interest on a five, ten, fifteen year plus view. As such, the trade should be planning for a more competitive British market for longer as a result of this deal being prohibited as bizarre as that may seem; duopolies tend to result in consumers’ being ripped off in the long run.

Post the CMA’s decision all eyes will be on Sainsbury’s future strategy, particularly for a grocery business that has been sustainably losing market share with falling underlying like-for-like sales in 2019 even with modest inflation in the system. We doubt that there will be a revolution at JS and talk of the security of Mike Coupe’s position appears knee-jerk to us. However, a reset and focus of some sorts is necessary as Sainsbury cannot cut itself to growth. Hence, expect some change from JS, particularly around availability, product specification, service and supply chain costs.

As for Asda, well Wal-Mart may be regretting its justification for the Sainsbury merger, not least the preference to exit the UK. Morale at Asda House maybe better now that collusion with Sainsbury has been prohibited and the mood music should be sweeter than is the case at Holborn too. Quite where Wal-Mart goes with Asda though remains to be seen.

“….the CMA has acted because it does not believe that a more concentrated industry is in the shoppers’ interest…”

For choice, we sense a period of quiet reflection and focus is most likely, particularly continuing to work on Asda’s price differential with the German discounters. Beyond that though we will see if private equity fancies Asda or if in time Wal-Mart sees a listing on the stock exchange, an initial public offering, as a route to escape these shores.

The attempted merger process has been a material concern for the supply trade. A little like Brexit, its implications were uncertain, but dealing with it probably meant change. Quite whether or not that change was good or bad was to be determined. Now with Sainsbury-Asda’s prohibition one uncertainty has been removed. However, because of that it probably means a more rather than less competitive industry in the long-run.

In this respect cost leadership will remain to the fore as supermarkets continue to work with their supply chains to reduce costs. The domestic and international grocery supply industry is Coriolis’ forte in working with operating executives to be more productive. Collaboration in this area maybe increasingly timely.

Dr Clive Black

Advisor to Coriolis

April 2019