Competition regulator likely to choke on Sainsbury’s-Asda deal

Prepare for the biggest competition inquiry in years. A merger of Sainsbury’s and Asda would create an operator with a bigger market share than Tesco, which only a few years ago was defending itself against “Tescopoly” complaints. A Sainsbury’s-Asda combination plus Tesco would have almost 59% of the market between them. At no point since the invention of supermarkets would there ever have been a hope of getting a regulatory thumbs-up.

Back in 1997, a smaller proposed merger between Asda and the former Safeway was blocked on competition grounds. Safeway was eventually bought by Morrisons in 2003 after being forced to shed 53 stores. The official view seemed clear. Only Morrisons, as the smallest of the five national chains, would be allowed to do the deal. Having a minimum of four big operators was regarded as vital to ensure keen competition and low prices for consumers.

Sainsbury’s and Asda can try to argue that analysis is out of date. They could say the German discounters, Aldi and Lidl, are now an established force in the UK. They could argue that Tesco’s buying power would still be greater because the current leader has been allowed to buy the wholesaler giant Booker. They could suggest that the long-term threat from Amazon acts as a brake against price gouging by any big player. They could promise to recycle cost savings into lower prices.

It is hard to imagine the Competition and Markets Authority (CMA) swallowing any of those arguments whole. Supermarket executives obsess about Amazon, but the US online giant currently has a tiny presence in UK groceries. It has an experimental supply deal with Morrisons, but that’s about it. The Booker argument is a hard one to push because the CMA took the view that grocery retailing and wholesaling are different markets.

As for the idea that a Sainsbury’s-Asda combination would be good for consumers, that looks highly contentious. The UK supermarket scene is the most competitive it has been in years, thanks in large part to the discounters.

The big operators’ profits margins have roughly halved to between 2% and 3% under the strain, but that’s not the CMA’s problem. It is free to tell Asda to compete its way out of its current trading difficulties, rather than seek sanctuary in combination with Sainsbury’s. Asda, after all, is owned by Walmart, the world’s biggest retailer, and ought to be capable of fighting harder. This deal looks a very long way from being done.