How are the share prices of Tesco and little ol’ Morrisons doing as a bigger and fiercer supermarket creation – the two-headed Sainsbury’s/Asda beast – comes into view? Are they collapsing as investors prepare for keener price competition? Are executives also trembling in fear of their bonuses as Sainsbury’s boss Mike Coupe vows to unleash 10% price cuts?
Hardly. While Sainsbury’s market value has improved by 16% since Monday morning, investors in Tesco and Morrisons have not recoiled in horror. Share prices in both firms have barely budged.
Let’s hope the Competition and Markets Authority (CMA) is watching. Its job is to protect the interest of consumers and, to judge by the stock market’s reaction, it’s hard to spot any clear gain for shoppers via this proposed £15bn mega-merger. Almost nobody in the City is talking about supermarkets having to compete harder for custom, thereby putting their profit margins under renewed pressure.
UK’s top three supermarkets
Head office Welwyn Garden City
Chief executive Dave Lewis
Stores 6,809 worldwide/3,400 UK
Employees 460,000/310,000 UK
Market share 27.6%
Annual sales £51bn
Profit last year £1.3bn
Shopper visits a week 79m (worldwide)
Head office London
Chief executive Mike Coupe
Stores 1,414 grocers (+ 800 Argos)
Market share 15.8%
Annual sales £29bn
Profit last year £503m
Shopper visits a week 26m
Head office Leeds
Chief executive Roger Burnley
Market share 15.6%
Annual sales £22bn (2016)
Profit last year n/a
Shopper visits a week 18m
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In Coupe’s view, the reward for consumers will be 10% lower prices of “many of the products customers buy most regularly”, but since he hasn’t bothered to state what these products are, or even be precise about how many are on the list, his promise is too vague to be trusted. He has confidently predicted the annual boost to profits for shareholders will be £500m but has offered no equivalent round-number saving for shoppers.
Bruno Monteyne from Bernstein, viewing affairs through the lens of a stock analyst, calls it “a great deal, at a great time, at a great price”. It probably is – for Sainsbury’s. But shoppers and the CMA should note two of his observations. First, Asda-owner Walmart, which will end up with a 42% stake in Sainsbury’s, is “not in the UK to invest material amounts of capital” and is instead in the game of “harvesting cash”. Second, the merger partners have signalled they want to be “rational”, which means the deal “is not a new phase in a price war cycle”.
Sainsbury’s has been convinced by its lawyers that the CMA will approve the deal with few restrictions because the boffins, on the evidence of recent Tesco/Booker and Ladbrokes/Coral rulings, take a broader view of what counts as a competitor these days and will be impressed that Aldi and Lidl exist. That analysis may prove correct, but the CMA, if it’s doing its job properly, should look beyond standard spreadsheets detailing local catchment areas.
This merger would radically alter the structure of a supermarket industry where competition is demonstrably working well. Two companies would have a combined share of about 60%, a concentration that is surely only tolerable if there are easy-to-identify and permanent benefits for the customers. On evidence seen so far, shareholders have reasons to cheer but shoppers don’t.
Barclays stuck in the tunnel
Edward Bramson, the activist investor on Barclays’ tail, didn’t copy the climate change protesters by storming the stage at Barclays’ annual meeting. As far as we know, he didn’t even attend. Had he done so, he could have made a reasonable request to John McFarlane: please find a new cliche.
At his first annual meeting as chair, in April 2016, McFarlane declared there was “light at the end of the tunnel”. In May last year, there was an upgrade: “Despite a few remaining dark patches, the light at the end of the tunnel gets brighter with each step”. On Wednesday, McFarlane removed the reference to dark spots and said the light is still improving.
Up to a point, this talk of Barclays moving into a “new phase” is legitimate. Chief executive Jes Staley – when he isn’t being criticised by the Financial Conduct Authority for failing to exercise due skill, care and diligence in the whistleblower episode – has stuck to the intended script. Barclays Africa was sold, a reasonable deal was done with the US Department of Justice on mortgage-backed securities and it is more possible to believe (but by no means guaranteed) that the investment bank isn’t a money-pit.
Yet the self-congratuatory tone from the boardroom jars. Shouldn’t Barclays have exited the tunnel by now? Remember McFarlane’s earlier ambition in July 2015, as told to top managers: the aim was to double the bank’s share price in three years. With two months left on the clock, it’s not happening. The shares were 260p at the time; now they’re 206p.
Bramson’s improvement plan for Barclays, whatever it is, may be wrong-headed and risk a return to a murkier part of the tunnel. But, if one complaint is that McFarlane promised faster returns for shareholders than Barclays has delivered, his point would be fair. One assumes the chair knows as much, which would explain why he plans to stay for another year.