J Sainsbury and Asda Stores Limited to potentially merg
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% . 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 
Market Cap: £5.83bn 
Revenue: £28.456bn 
Operating Income: £518mn 
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. 
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) 
Operating Income: £791.7m (2016) 
(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 . 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% . 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 . 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.
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