Why Amazon is driving force behind Asda-Sainsbury’s merger

The rapid expansion of discounters Aldi and Lidl – whose share of the grocery market has rocketed from less than 4% a decade ago to nearly 13% today – has hit all traditional supermarkets. But the industry’s biggest fear is Amazon.

Sainsbury’s boss Mike Coupe has long made clear that his real concern is the online giant, which is now the world’s second biggest company, valued at $740bn compared with Walmart’s $264bn. Coupe admitted that his 2016 acquisition of catalogue store Argos was intended partly as a way to fight off the increasing threat from Amazon.

Since that deal Amazon has turned its sights directly onto the grocery business. Last year it paid $13.7bn to take over US grocer Whole Foods Market. More recently it has opened a “shop and go” unstaffed food store called Amazon Go, where shoppers can pick their goods and walk out, paying online without passing through a check-out. Both of those moves hit the share prices of UK supermarket groups.

Quick guide

UK’s top three supermarkets

1) Tesco

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)

2) Sainsbury’s

Head office London

Chief executive Mike Coupe

Stores 1,414 grocers (+ 800 Argos)

Employees 195,000

Market share 15.8%

Annual sales £29bn

Profit last year £503m

Shopper visits a week 26m

3) Asda

Head office Leeds

Chief executive Roger Burnley

Stores 642

Employees 165,000

Market share 15.6%

Annual sales £22bn (2016)

Profit last year n/a

Shopper visits a week 18m

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Amazon also has a deal with Morrisons to provide groceries to UK customers using its Pantry and Prime service. Morrisons and Sainsbury’s have both been touted as possible Amazon takeover targets, along with Ahold Delhaize in the Netherlands and France’s Carrefour.

Terry Hunter, managing director of digital commerce group Astound, described Amazon as the elephant in the room. The proposed Sainsbury-Asda merger, he said, “shows that the two chains feel they will be stronger together as they reposition themselves to combat the growing threat from the low-cost German supermarkets and Amazon”. The UK’s grocers, he added, know Amazon “will be able to outmanoeuvre them and undercut them every step of the way”.

Linking with Asda and its giant parent Walmart would give Sainsbury’s more buying power, to secure better deals with suppliers to compete with Amazon on price. The new Sainsbury-Asda group would also be able to benefit from Walmart’s huge investment in digital innovations, such as a smartphone shopping app and automated parcel pick up machines for online shopping.

Walmart has also been searching for a way to fight off Amazon in the US. Russ Mould, investment director at stockbroker AJ Bell, said Walmart is far from confident it can keep Amazon at bay. “It is hard to believe that a company with $500bn in annual sales has a reason to be frightened of anyone, but Walmart has its competitors too,” he said. “Amazon’s acquisition of Whole Foods suggests it may be about to start attacking the grocery market … Only time will tell but Walmart is not waiting to find out.”

Walmart International boss Judith McKenna suggested the tie-up with Sainsbury’s could add another weapon to Walmart’s armoury outside the UK. Sainsbury has benefited from putting dozens of Argos outlets into its supermarkets and its fast deliveries, using a network of small stores, could be a more efficient alternative to Amazon’s large centralised warehouses. McKenna said Walmart is now considering using Argos in the US and elsewhere help to fight off Amazon more effectively. For the owner of Asda, Amazon poses a serious threat on both sides of the Atlantic.