“The defensive merger between two rivals may well force the Bradford firm to seek out a merger or a deal of some kind with the Co-Op. Although this will not make a huge dent in the market share gap between Morrisons and Tesco and the proposed Sainsbury-Asda entity, such a move would at least take Morrisons’ market share back above the combined reach of the discounters Aldi and Lidl, who continue to act as a disruptive force in the UK grocery market.
“Morrisons’ next move is however just one of four big issues which are raised by the proposed Sainsbury-Asda link-up:
1. What will Morrisons (and the other UK grocers) do in response?
A tie-up with Co-Op to at least keep the discounters at bay would seem to make sense. Despite the dangers that come with merger and acquisition (M&A) deals), all of the UK’s grocery players will still be wondering what Amazon has in mind after its 2017 purchase of Whole Foods and the competitive landscape will surely keep changing.
2. How will Sainsbury’s-Asda use its enhanced market share?
The deal does look like a defensive one, especially as both Sainsbury and Asda have been losing market share, according to the data provided by industry consultant Kantar Worldpanel. In the 12 weeks to 25 March 2018, Sainsbury’s sales rose 0.6% year-on-year but its market share fell to 15.8% from 16.1%. Asda also lost share, as Aldi and Lidl’s relentless advance continued and Tesco and Morrisons also grew faster than Sainsbury or Asda.
| Market share | ||
| March 2018 | March 2017 | March 2016 |
Tesco | 27.6% | 27.6% | 28.4% |
Sainsbury | 15.8% | 16.1% | 16.8% |
Asda | 15.6% | 15.8% | 16.2% |
Morrison | 10.4% | 10.5% | 10.6% |
Aldi | 7.3% | 6.8% | 5.3% |
Co-Op | 6.0% | 6.1% | 6.0% |
Lidl | 5.3% | 5.0% | 4.2% |
Waitrose | 5.0% | 5.1% | 5.2% |
Iceland | 2.1% | 2.2% | 2.1% |
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Sainsbury + Asda | 31.4% | 31.9% | 33.0% |
Morrison + Co-Op | 16.4% | 16.6% | 16.6% |
Aldi + Lidl | 12.6% | 11.8% | 9.5% |
Source: Kantar Worldpanel
Wal-Mart’s latest quarterly numbers showed a drop in profit at Asda and only modest sales momentum, as the company invested in (cut) pricing. Kantar’s data suggests Sainsbury has been following a different strategy by cutting down on promotions – only a third of its sales came from discounted goods, according to Kantar in the 12 weeks to 25 March – so a combined company will decide how it wishes to position itself.
Cost-cutting will be one likely consequence of any Sainsbury-Asda merger and unfortunately there may be a lot of nervous employees in both firms’ head offices, IT departments and buying teams in particular this weekend.
The question then is whether these cost cuts are invested in prices and market share, margins, or a combination of the two.
3. Will the deal work?
The last big deal in the UK grocery business was Morrison’s £3 billion purchase of Safeway in 2004. This resulted in multiple profit warnings from Morrisons, which ultimately reaped financial and strategic benefit from the deal – although its shares are no higher now than they were then.
Getting the most out of a combination of Sainsbury and Asda will not be straightforward, even if there is relatively limited overlap in terms of the store estate, either major sites or local, conveniences ones.
Sainsbury has also pleasantly surprised many with the strategic benefits it has wrought from its acquisition of Argos, in terms of online capability, but investors are likely to have more faith in promises of cost synergies than there are in revenue benefits, as the history of big M&A deals suggests sales synergies are rarely, if ever, delivered, at least on time.
4. Wal-Mart’s focus is on Amazon, not the UK grocery market
It is hard to believe that a company with $500 billion in annual sales has a reason to be frightened of anyone, but Wal-Mart has its competitors too, and Amazon is probably the one that is exercising the management of Arkansas-headquartered giant.
Amazon’s acquisition of Whole Foods suggests it may be about to start attacking the grocery market, although it is possible that Amazon CEO Jeff Bezos was more interested in Whole Food’s distribution capability and the logistics potential of its stores than its actual product offering.
Only time will tell but Wal-Mart is not waiting to find out. It has sought to bolster its online capability through the acquisition of both Bonobos and Jet.com and its proposed swoop for Flipkart in India shows that Wal-Mart is far from satisfied that it can keep Amazon at bay.