Belfast Telegraph

Donald McFetridge: Sainsbury's, Asda merger just beginning for UK's retail sector

Analysis

By Donald McFetridge, Independent Retail Analyst

The weekend's news that Sainsbury's and Asda are to merge to become a retail superpower appears to have sent shockwaves throughout the retail industry. But, to me, it comes as no great surprise. Deals of this nature and kind are constantly on the cards. In fact, I can confidently predict that this is the first of many more mergers and acquisitions to come.

Before the Brexit referendum, there was a global trend towards the development of pan-European retail supergroups, with constant rumours in the industry of talks between the leading UK supermarket groups and companies like Carrefour in France, and Albert Heijn in The Netherlands.

These discussions often lead to nothing, but in the instance of Sainsbury's and Asda things are looking very different indeed, particularly after the very bullish announcement that the new retail supergroup will result in no store closures and no job losses.

That greatly surprises me since it is almost inevitable that the Competition and Markets Authority (CMA) will conduct a full and thorough investigation into the finer details of the new business venture and, if past form is anything to go by, they will call for stores to be sold off where local monopolies exist in certain parts of the country.

This could, potentially, lead to some store closures and job losses in Northern Ireland as well as in other geographic regions of the UK.

In this region, Sainsbury's had originally planned to have a store portfolio of 20 stores - they currently have 15. Asda (when they took over the Morrisons store portfolio in Northern Ireland) was also keen to expand. Both store groups have found that it has been extremely difficult to do so, although Asda has been successful in gaining planning permission for a number of new stores.

Nationally, both Sainsbury's and Asda have found themselves in the position that it is becoming increasingly difficult to grow market share through the organic route. Therefore, the merger seems like a very good opportunity for both retailers, both here in Northern Ireland and in the rest of the UK. There are obvious scales of economy benefits for both store groups, but there are also fairly obvious questions about healthy competition in the retail grocery sector.

However, to announce that there will be no store closures and no job losses strikes me as a very bold statement.

The big question is WHY are these two store groups merging? While it is accurate to state that Asda is stronger in the north of the UK and that Sainsbury's has a stronger power base in the south, the geographical position of their store portfolios is not a good enough reason to merge.

I would respectfully suggest that the principal reason for the merger is to cut costs, the benefits of which will (hopefully) be passed on to consumers.

Even if there are no store closures and no job losses (which I very much doubt will be the case), there will have to be cost savings realised in their distribution networks.

Suppliers will undoubtedly be further squeezed for tighter and tighter margins, which could very easily result in job losses in the supply chain. The newly-formed retail supergroup will most definitely have better purchasing power and stronger buying muscle than ever before, and they will almost certainly be looking to realise price benefits in the supply chain.

When Sainsbury's announced their store development programme for Northern Ireland in June 1995, David Sainsbury (now Lord Sainsbury of Turville) promised NI consumers that they would see price savings of between 10-12% in their weekly (at that time) shopping baskets. However, many consumers would argue that this did not turn out to be the case.

Yesterday's announcement by Sainsbury's chief executive, Mike Coupe, similarly promised that there would be price savings for consumers of "around 10% on many of the products customers buy regularly". Based on past experiences here, I have my doubts about this price promise.

At the end of the day, this merger is about two principal factors: to help both retailers to take on the imminent threat of the arrival of Amazon and its foray into the grocery sector in the UK, and the rapid advances of discounters like Aldi and Lidl who have successfully managed to erode the market share of Sainsbury and Asda.

Another reason why Sainsbury's and Asda want to merge is to trim costs, and that will most likely be done through store rationalisation (in spite of their promises) and job cuts both in stores and in their respective administration centres.

Ostensibly, the merger is being presented as a great idea for both companies to take on Tesco, Amazon and the discounters in order to be able to pass on price savings to consumers.

In reality, it means trimming costs, adjusting budgets, squeezing suppliers, closing stores and job losses. Nothing is ever quite what it seems - even in the retail world.

Belfast Telegraph

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