Asda and Sainsbury’s in talks over 2018 merger deal

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New supermarket group would have 31.4% market share, compared with Tesco’s 27.6%

Sainsbury’s and Asda are in talks over a £10bn merger that would send shockwaves through the high street by creating a retailer more powerful than the current market leader, Tesco.

A tie-up between the UK’s second- and third-largest supermarket chains would create a new group with huge share of the market in food, clothing, household goods and toy retailing.

Sainsbury’s already owns Argos while Asda’s George clothing brand vies with Marks & Spencer and Primark to sell the most clothing in volume terms. The enlarged supermarket group would have nearly 3,000 stores and annual sales of more than £50bn.

Any proposed deal is likely to be closely scrutinised by the competition watchdog over concerns it would tighten the grip the four major supermarket chains – Tesco, Sainsbury’s, Asda and Morrisons – have on the UK grocery market.

Market share

Analysts also suggest the combination could lead to thousands of job losses as the two chains cut out duplication. The big supermarkets have recently cut thousands of back-office and shopfloor jobs in a drive to cut costs. They are trying to rebuild their profits, which have collapsed as the fast-growing German discounters Aldi and Lidl have stolen shoppers, while online players led by Amazon have sucked sales out of the high street.

Mike Coupe, the chief executive of London-based Sainsbury’s, is said to be in the driving seat, making the future of Asda’s Leeds head office look uncertain. A combination of the two groups would be expected to strip out costs by consolidating back-office operations. Asda is run by a former Sainsbury’s executive, Roger Burnley, who quit the group for a more senior role at the rival in 2015.

Sainsbury’s confirmed it was in talks with the US retail giant Walmart, which has owned Asda since 1999. “Sainsbury’s confirms that it and Walmart Inc are in advanced discussions regarding a combination of the Sainsbury’s and Asda businesses,” the company said in statement rushed out on Saturday afternoon after Sky News and the newswire Bloomberg both reported the story.

Number of stores

Sainsbury’s promised to provide more details to the stock exchange on Monday morning.

It has previously been unthinkable that there would be consolidation among the UK’s big four supermarkets because of competition concerns, but the retailers are said to have been emboldened after the Competition and Markets Authority (CMA) waved through the merger of Tesco and Booker, the UK’s biggest retailer and grocery wholesaler respectively.

The deal comes at a time of major upheaval in the retail sector as Aldi and Lidl become increasingly powerful and the cost of running high street stores increases because of higher business rates and labour costs.

Staff numbers

Sainsbury’s is also looking for ways to shore up its market position in the wake of Tesco’s recent takeover of Booker. That deal increased Tesco’s buying power by creating a food group with sales of £57.5bn.

Sainsbury’s has a network of more than 1,400 supermarkets and convenience stores while Asda has around 600 stores. Sainsbury’s also has 800 Argos outlets.

The most recent market share data from the grocery experts Kantar Worldpanel puts Tesco, the UK’s longstanding UK number one, in the lead with a 27.6%. Sainsbury’s and Asda command shares of 15.8% and 15.6% respectively, which means the combined business would ring up more 31.4% of UK grocery sales.

Annual sales

“It’s hard to see this being good for consumers,” said Scott Corfe, the chief economist at the Social Market Foundation thinktank. “Recent experience, with the rise of Aldi and Lidl triggering a supermarket price war, supports the case for a less concentrated groceries sector – not a more concentrated one.”

It is unclear how the deal between Sainsbury’s and Asda might be structured. Sainsbury’s is listed in London and it is understood US-listed Walmart intends to retain a large shareholding in the enlarged group. Further clarity is expected on Monday.

The Usdaw union’s national officer, Joanne McGuinness, said it would be seeking urgent meetings with the businesses to get more detail on what a merger would involve. “Our priorities will be to protect our members and ensure any deal between the retailers does not impact on their jobs or incomes,” she said.

If the merger happens it would be biggest shake-up in UK grocery retailing since Morrisons took over Safeway in 2004. Analysts debated the merits of the proposed deal on social media, with many convinced competition concerns would force the companies to sell off a large number of stores.

Bryan Roberts, a TCC Global analyst, also questioned the logic of the deal. “I don’t see what problems this solves. They will still be unable to be cheaper than Aldi and Lidl because they have a unique operating model. I was also expect that there would need to be a chunky disposal programme once the CMA has looked at local competition issues.”

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