Sainsbury's CEO Justin King's claim that a proposed £10.6bn takeover of the company by Delta Two would not hamper Sainsbury's ability to perform well in a competitive market is broadly right ('Buying power leads to better prices? I don't buy that argument says King', The Grocer, 13 October, p4). A price war severe enough to cut Sainsbury's profits to levels where it could not maintain investment after the additional costs of debt service would be of unprecedented scale in the history of the UK grocery industry. If Tesco lead, Asda would follow, or vice versa, and the impact on both would be highly costly. For Tesco especially, this would not be rational behaviour. Tesco needs a profitable UK market to support investment in international growth. Even if it did succeed in forcing Sainsbury's to sell off some stores or even go out of business, Tesco would not be the winner. The stores would resurface under Asda or Morrisons' ownership, because it would be less likely that Tesco would be allowed to buy them, and competition would be tougher. There is a scenario under which Asda could become tougher on price. Despite its recent improvement in performance, Wal-Mart cannot be happy with being the UK's third-biggest supermarket. Maybe, if it could convince itself the short-term pain of a major price war was worth it, it could force Sainsbury's to reign back expansion and possibly sell off some stores. However, the cost of such an action would be huge. On balance, we do not think Asda would see this as attractive.

Topics