Sainsbury’s and Asda should not sing too soon

Sainsbury’s shares rose 15% on the idea of combining with Asda. One can see why. The chief executive, Mike Coupe – who was yesterday captured on camera by ITV singing “We’re in the money” – is promising a £500m-a-year boost to profits. Tesco would be knocked off its top perch. And Walmart, after a bruising few years in the UK, is selling Asda on loser’s terms – the Americans have even agreed to tow away Asda’s pension fund. Fine – but don’t sing too soon. This deal needs regulatory approval and then has to be made to work. There are reasons to be sceptical.

First, Coupe’s view of how the Competition and Markets Authority will view his “historic” reshaping of the UK grocery market sounded optimistic. He said the CMA applies “a higher level of sophistication” these days than the “blunt fascia test” that prevailed in 2003 when Tesco, Asda and Sainsbury’s were barred from buying Safeway. Does it really?

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It is true the CMA is fond of measuring competition at a local level and that discounters Aldi and Lidl are now forces in the land. But Sainsbury’s/Asda plus Tesco would control more than half the UK grocery market, which is close to being a working definition of a duopoly. However many local studies are produced, that concentration of national power is hard to ignore.

Coupe claimed an expanded Sainsbury’s would have only 26% of the market, not the 31% estimated by independent agencies, but he included M&S and Boots in his reckoning, which showed how hard he was straining to position this deal within traditional parameters. Unless one is living off a diet of sandwiches and Lucozade, Boots is not a grocer.

This deal is a bet on a CMA that is being asked to sanction a huge structural change in a market where competition is working well. Sainsbury’s and Walmart will inevitably be told to sell some stores, and would probably be relieved if the figure is only 70 or so. At double that, though, some of the commercial benefits will evaporate.

A second problem is Coupe’s assertion that consumers will benefit via 10% price cuts on “many of the products customers buy regularly”. How many products? How long will the price cuts last? And what about products that are bought less often? He didn’t say. While shareholders are promised £500m-a-year of quick savings, shoppers are being asked to take a lot on trust, as the CMA will surely also note.

Nor did Coupe say that Sainsbury’s and Asda will sell identical products at identical prices after equalising buying terms. In fact, the proposed “two-brand” strategy suggests the opposite approach. How will that work? If a common buying team is buying Coca-Cola or Heinz ketchup at a fixed price, surely Sainsbury’s customers in the new world would expect to pay the same as Asda shoppers. Fluffy boardroom talk about the different “brand positioning” may cut little ice.

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One can admire Coupe’s imagination and opportunism. He has correctly identified Walmart’s weariness with the UK and, rather than sit around waiting for Amazon to make its inevitable attack on the UK supermarket sector, he is trying to make preparations. That’s what he’s paid to do. More UK taxes, presumably from Asda not posting dividends across the Atlantic, will play well with UK politicians. His broadside against “multinational” suppliers with fatter profit margins than supermarkets – who are thus able to trim their prices – also hit the mark.

But his Asda deal faces 12-18 months of intense regulatory scrutiny. It’s not yet over the line, and the gamble will rebound on Sainsbury’s if the CMA plays rough.