J Sainsbury and Asda Stores Limited to potentially merg

LSE's largest society and first point of call for students and employers

J Sainsbury and Asda Stores Limited to potentially merg

Shrey Srivastava

30th December 2018

 

Merger Details: J Sainsbury plc

J Sainsbury plc is the holding company for Sainsbury’s, the second largest chain of supermarkets in the UK by market share, currently at 16.9% [1]. It is also comprised of two other segments: Sainsbury’s Bank and Sainsbury’s Argos. Smaller but still significant are the group’s interests in property.

Founded in: 1869

Headquartered in: London, United Kingdom

CEO: Mike Coupe

Number of employees: 186,900 [2]

Market Cap: £5.83bn [2]

Revenue: £28.456bn [2]

Operating Income: £518mn [2]

Share Price: 264.90p

 

Merger Details: Asda Stores Limited

Asda is a British supermarket retailer, founded in the mid-20th century when the Asquith family’s supermarket group merged with Associated Dairies, a company headquartered in Yorkshire. Since 1999, it has been owned by Walmart and is currently the third biggest supermarket chain in the UK after Tesco’s and Sainsbury’s. [3]

Founded in: 1949

Headquartered in: Leeds, United Kingdom

CEO: Roger Burnley

Number of employees: 165,000

Market Cap: N/A

Enterprise value: N/A

Revenue: £21,666mn (2016) [4]

Operating Income: £791.7m (2016) [4]

(Companies’ details can be found above)

 

It is not a stretch to say that if the above merger is approved by the UK Competition and Markets Authority (CMA), it would create a supermarket behemoth. The combined revenue of the proposed joint entity would be £51bn, from 2800 combined Sainsbury’s, Argos, and Asda stores around the country [5].  One of the primary arguments of Sainsbury’s and Asda towards allowing the merger to go ahead is that a potential £500mn could be saved through streamlining certain functions and also economies of scale. However, with a combined market share of 31.4% after the merger, concerns have been raised about the potential impact of a monopoly on consumers.

However, in a statement on its website Sainsbury’s actually announced that it expected to slash the prices of “popular products” by 10% [5]. Whether this actually happens, however, depends on the extent of competition in the supermarket industry. The two main players in such a market would be Tesco and Asda/Sainsbury’s, so if competition results in price cutting measures by both then the consumer may benefit. However, as seen in the supermarket industry recently there is likely to be a degree of price rigidity as both firms struggle to maintain profit margins, so any benefit to the consumer from the merger is highly uncertain.

Moreso, news has now come out that in order for the merger to pass the CMA, Sainsbury’s and Asda may have to close around 460 stores [7]. This is because the UK’s competition watchdog found that the supermarkets’ catchment areas have 463 areas of overlap, indicating the potential for monopoly to form in these regions. This further limits potential benefits from economies of scale but could serve to allay the fears of some commentators that the merger would lead to large-scale price increases across the board.

Overall, to summarise, the deal between Sainsbury’s and Asda will effectively (if it gets through the CMA) turn the UK supermarket industry into a duopoly, where the combined entity fights with the slightly smaller Tesco for market share. A secondary impact of such a move is that Walmart would own 42% of the combined entity, consolidating its outreach outside the US. Like many past mergers, benefits to the consumer are likely to be overstated by both companies, and in my opinion the merger would lead to further large-scale homogenisation of supermarkets in the UK. Cost advantages make it far harder for smaller retailers to keep prices as low as larger supermarkets, and hence we are likely to see further pressure on these retailers as a result of this merger.

 

Bibliography:

[1] Barber, L. (2015). Asda overtaken by Sainsbury’s as UK’s second supermarket. [online] Cityam.com. Available at: http://www.cityam.com/207026/sainsburys-overtakes-asda-become-uks-second-largest-supermarket-big-four-continue-slide [Accessed 30 Dec. 2018].

[2] Sainsbury’s. (2018). Sainsbury’s Financial Statements 2018. [online] Available at: https://www.about.sainsburys.co.uk/~/media/Files/S/Sainsburys/documents/reports-and-presentations/2018/sainsburys-ar-2018-financial-statements.pdf [Accessed 30 Dec. 2018].

[3] Statista. (2015). Statista – The Statistics Portal. [online] Available at: https://web.archive.org/web/20140117022207/http://www.statista.com/statistics/279900/grocery-market-share-in-the-united-kingdom-uk/ [Accessed 30 Dec. 2018].

[4] Walmart. (2016). Walmart FInancial Statements 2016. [online] Available at: https://s2.q4cdn.com/056532643/files/doc_financials/2016/annual/2016-Annual-Report-PDF.pdf [Accessed 30 Dec. 2018].

[5] Neal, C. (2018). Why the Asda and Sainsbury’s merger will save you a lot of money on food bills. [online] mirror. Available at: https://www.mirror.co.uk/news/uk-news/what-12billion-sainsburys-asda-argos-12452882 [Accessed 30 Dec. 2018].

[6] Butler, S. (2018). Sainsbury’s-Asda merger could lead to ‘monopoly’ towns in UK. [online] The Guardian. Available at: https://www.theguardian.com/business/2018/may/06/sainsburys-asda-merger-monopoly-towns-uk [Accessed 30 Dec. 2018].

[7] Butler, S. (2018). Sainsbury’s and Asda may have to offload 460 stores to seal merger. [online] the Guardian. Available at: https://www.theguardian.com/business/2018/sep/27/sainsburys-and-asda-could-close-400-stores-to-complete-merger [Accessed 30 Dec. 2018].

No Comments

Add your comment