The market is still coming to terms with the Tesco-Booker deal and now this: a £51bn-sales combination play between Sainsbury’s and Asda. So what will it mean? It’s clearly a bombshell announcement, though whether it’s surprising is another matter.
Sainsbury’s plc (which will remain the name of the combined Sainsbury’s-Asda business) is promising to create a “dynamic new player in UK retail, with an outstanding breadth of products delivered through multiple channels”. Sainsbury’s will retain control thanks to a £2.975bn cash payment to Walmart. The chairman (David Tyler), CEO (Mike Coupe) and CFO (Kevin O’Byrne) will all hail from Holborn, which will remain the HQ. In return, Walmart will take a 42% stake, and have two seats on the board. Asda will continue to be run by CEO Roger Burnley, and there are no plans to close its Leeds HQ.
Asda has struggled to compete against the discounters Aldi and Lidl (appearing powerless to close the price gap, despite massive cost-cutting and restructures), while it’s not been lost on Bentonville that the threat of a resurgent Tesco has only been compounded by the acquisition of Booker and the arrival with it of its hugely admired CEO Charles Wilson to run Tesco’s UK operations.
The imperative on the Sainsbury’s side is obvious too. Its acquisition of Argos, with same-day delivery in more parts of the country than Amazon, as well as click & collect, has been a considerable success, bolstering GM sales and enhancing its online capabilities. But Sainsbury’s is struggling to compete on price on the food and drink front and has fallen further behind Tesco in terms of scale with the Booker merger.
But “investments in price and overall customer proposition” would lead to “a planned reduction in operating profits” from £845m to £720m.
Much of the logic of the deal lies in greater buying power. Sainsbury’s has identified £500m of buying “synergies”, with multinational suppliers (85% of their products are currently supplied by the same 100 suppliers) expected to generate savings of £350m purely through price harmonisation. A further £75m each will come from integrating Argos outlets into Asda stores, and the rest from savings on utilities and other operational costs. These synergies would be in addition to the 10% reduction in prices on “many of the products customers buy regularly” that Sainsbury’s expects.
As well as the obvious clout of joining together two supermarkets with a combined market share of 32% (a bigger share of course than Tesco’s 28%) the deal will also give it access to Walmart’s even greater heft, via joint buying arrangements, while Asda could benefit from Sainsbury’s greater own-label expertise.
However, Aldi and Lidl have launched a counterattack on Sainsbury’s and Asda insisting they will remain “significantly” cheaper than their rival supermarkets. The German discount chains have thrown down the gauntlet, declaring they will “never be beaten on price” amid speculation that the cost of groceries at two of their British rivals will be slashed should a planned merger between Sainsbury’s and Asda be approved by the Competition and Market Authority (CMA).
“In the latest UK Customer Satisfaction Index, Sainsbury’s was rated the 39th highest-performing organisation, and Asda didn’t appear in the top 50 at all. With Aldi, Waitrose and M&S Food all ranking within the top 20, there is a clear window for the newly merged retailer to shape a strong customer service strategy and earn its place amongst the ever-changing supermarket leaders for satisfying customers.
With today’s increasingly-savvy consumers being aware of the value of their custom, pushing retailers, rightly, to invest in customer service standards. This move should be no different. The merge should recognise, and be sensitive to, the needs and preferences of long-standing customers from both supermarkets as well as those interested in making the switch.”