Sainsbury’s and Asda play seismic supermarket sweep | Zoe Wood

Retro 90s fashion is a huge trend on the high street at the moment but that nostalgia has now spilled over into food retail as the supermarket giant Sainsbury’s attempts a blockbuster deal that will result in it seizing back the UK grocery crown it surrendered to Tesco in 1995.

The UK’s second-largest retailer has confirmed plans to merge with its nearest rival Asda in a £15bn deal that will create a mega grocer with more than £50bn sales and 2,800 stores. The details of the merger will be spelled out in a stock exchange announcement on Monday morning but analysts have already spent the weekend crunching the numbers after the news leaked out on a grey Saturday afternoon.

Sainsbury’s and Asda in shock talks over £10bn merger deal

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The Bernstein analyst Bruno Monteyne predicts the supermarket bosses could carve out cost savings of £600m on the back of the deal. The huge figure could mean heavy job losses at the two companies, which have already endured multiple rounds of head office and shop-floor cuts against against a backdrop of an intensifying supermarket price war with the German discounters Aldi and Lidl.

With a combined workforce of 360,000 and potentially hundreds of overlapping stores, retail experts predict seismic changes on the horizon as a result of the blockbuster deal. It will automatically trigger a competition probe, which history suggests could force store sell-offs in a tough retail climate where there are likely to be fewer buyers than during more buoyant economic times when there was a space race among the big supermarket chains.

Monteyne says the two retailers have different fortes that will enable them to improve the other’s performance: “Asda has been struggling in the UK to deal with both the threat of discounters and the growth of e-commerce, particularly in non-food,” he says. “It is also weak in private label, the biggest battlefield against discounters. Both of these are areas that Sainsbury’s excels in. Sainsbury’s weakness is pricing.”

If the deal goes ahead Walmart, which has owned Asda since 1999, will receive Sainsbury’s shares in exchange for Asda’s circa 600 supermarkets, becoming the company’s biggest shareholder. The combined group is expected to have a market value of £15bn, including debt.

The deal understandably raises competition concerns. The enlarged Sainsbury’s group would have a huge share of the market in food, clothing, household goods and toy retailing. Sainsbury’s also owns the 800-store Argos chain while Asda’s assets include the George clothing and homewares brand, which is a major player at the no frills end of the market.

The most recent grocery market share data from the retail experts Kantar Worldpanel puts Tesco, the UK’s longstanding No 1, in the lead with 27.6%. Sainsbury’s and Asda command shares of 15.8% and 15.6% respectively, which means the combined business would ring up more 31.4% of UK grocery sales.

Before the deal can be given a green light, economists at the Competition and Markets Authority (CMA) are expected to spend months poring over a map of the combined group’s store network. They will scrutinise every location and test whether the choice of retailers, typically within a 10-to-15-minute drive of each other, is materially reduced by the deal. In areas where there is only an Asda and a Sainsbury’s, regulators would be expected demand disposals.

The 2003 competition probe into the Safeway deal took five months and eventually forced Morrisons to sell off 53 stores but retail experts predict assessing the competition implications of merging the UK’s second and third biggest retailer could take up to a year to do.

The overlap between the two grocers’ stores is less than with other rivals because Sainsbury’s traditional heartland is the south-east while Leeds-based Asda is a major player in the north of the country. However, the TCC Global analyst, Bryan Roberts, says the number of affected stores could still be substantial.

“It would be miraculous if there was less than a 100 places where you have got an Asda and a Sainsbury’s in close proximity,” he says. “A lot depends on the CMA and whether they reevaluate what competition means, given the growth of Aldi and Lidl as well as online.”

The north-south divide between Asda and Sainsbury’s is also about more than geography as the two companies are culturally very different. Unlike Morrisons’ takeover of Safeway in the noughties, there are no plans to ditch either brand, a rationale explained by the lack of overlap in the demographics of their customer bases.

While Asda, with its focus on everyday low prices, targets shoppers on tight budgets, Sainsbury’s aisles are a destination for the middle-classes with more emphasis on ethical sourcing and foodie treats. “You could not get two more different businesses and bringing them together will be a Herculean task,” concludes Roberts.