Sainsbury's-Asda: has CMA painted itself into corner with competition methodology?

Oh to be a fly on the wall at the Competition & Markets Authority after Asda and Sainsbury’s hit the industry with their merger bombshell. The watchdog faces a decision that will shape the destiny of UK grocery.

It’s been fewer than six months since it was branded “toothless” by critics after Tesco completed its £3.7bn merger with Booker without a single store disposal.

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So, does the body need to step in to prevent supermarket power getting out of line with other major European markets, where typically no retailer wields near the c60% of Sainsbury’s-Asda and Tesco? And if so, does it need a new formula?

Unsurprisingly, much of the attention so far has centred on the impact on consumers. While Sainsbury’s boss Mike Coupe has stressed the prospect of 10% cheaper prices across everyday produce - a move warmly welcomed by consumers in a Grocer poll last week - MPs have warned that towns such as Brighton, Kirkcaldy, Torquay and Paignton could become large store “monopolies” for Asda and Sainsbury’s if the deal gets competition approval.

However, there is growing consensus among experts that, at least under the CMA’s evolved methodology, it will be hard for the body to do more than order a token sell-off of a few dozen stores, which would hurt, but probably not kill, the deal.

Minimal store sell-offs

Research for The Grocer by CACI claims that even if the CMA sticks to its traditional definition of a one-stop supermarket for its so-called ‘competitor set’, the number of store sell-offs would be less than 70.

But CACI says if the CMA extended the competitor set to include discounters Aldi and Lidl, as it did in the Tesco-Booker probe (a precedent already seized upon by Coupe and co), the number of disposals could be as low as 23.

“Sainsbury’s has just had 24 months with the CMA working on Argos and for at least the last three months they have been working with the best competition lawyers in the country,” said one retail property expert. “They know the precedent has been set about the discounters. They have thought it through seriously and we think it will go through. There may be a few dozen store sell-offs, tops, but that’s not going to stop this.”

Yet if the CMA does allow the deal to go ahead, it will create a situation of dominance in grocery retail unusual in Europe.

Research by LZ Retailytics (see box) looked at the 2017 combined market shares of the two largest grocers in each European country. Applying its figures to a post-merger scenario, in only three sparsely populated countries would the top two retailers have a higher share than Sainsbury’s-Asda and Tesco’s c60% share, namely Switzerland (83.93%), Finland (80.16%) and Iceland (73.10%).

The largest European economies - Germany, France, Spain and the UK - all currently cluster together, with a combined share of the top two retailers between 32% and 38%.

Such dominance leads some takeover experts to believe the CMA has to stop the deal.

“I find it conceptually hard to see how this will go through, despite the difficulties the CMA may face,” says one competition lawyer. He believes the authority may launch a large-scale survey of shoppers to investigate how such a takeover could impact on their choice of supermarkets, which could be used alongside the traditional sticking pins on a map.

Deal killer

“I can perceive a situation in which the CMA comes up with a figure of perhaps 200-300 stores that would have to be sold off,” he says. “Then what is to stop Tesco and the rest saying, ‘well actually we don’t want to buy these’? That could kill the deal.”

Crucially, he believes the CMA’s intervention will have to be based on the impact on shoppers, not suppliers, despite the squeeze they face.

MPs, though, have been calling for the CMA to put suppliers in the decision mix. The chairs of both the Efra and BEIS committees wrote to the authority last week, demanding more detail about its looming probe, with Efra committee chair Neil Parish warning suppliers could be “stitched up” by the deal. Coupe has already said he wants to secure price cuts from the retailers’ top 100 suppliers, to pay for the lion’s share of the £1bn gross synergies he thinks the deal will bring.

“The big question is how on earth does the CMA find a remedy that can protect suppliers?” says the legal source.

“Even if it came up with some sort of level of disposal that effectively says, OK 30% is too big but 25% is OK, that’s a crude vehicle and very unlikely.”

“It’s also going to be difficult for suppliers who are understandably going to be reluctant to raise their heads above the parapet lest it comes back to haunt them. The game has to be how to get the CMA interested by working with trade groups, like perhaps the FDF. But ultimately I think it will come down to consumers.”

So, with the lure of cheaper prices, will the CMA really risk months of legal challenges in the courts, not to mention ridicule, if its decision is overturned, by blocking the deal?

“The CMA is going to get huge flak if they don’t get some sort of remedy. It does feel like they have to show they have some teeth,” says a source. “But if you talk to Sainsbury’s or Asda they are adamant there aren’t going to be store closures.”

AG Parfett chairman Steve Parfett, a prominent critic of the CMA over Booker, is convinced it will not block this deal either.

“Should the CMA rip up its formula and start again? 100% it should. But I think it’s 99% they won’t. They have painted themselves into a corner with Tesco and Booker.

“Three or four years ago it would have been impossible for Asda and Sainsbury’s to even consider merging but now I think the CMA is just completely toothless and the government is even more hopeless, as it’s so distracted by Brexit.

“Even if the CMA does come up with a list of remedies, I don’t believe it will be anything other than a fig leaf.”

“They were scared to death of the legal firepower Tesco could bring if it put a spanner in the works of its merger and I think they will be thinking exactly the same thing now about Asda and Sainsbury’s.”