CMA publishes initial feedback on proposed Asda and Sainsbury’s merger

Feedback in the preliminary stages of the Competition and Markets Authority’s investigation into the proposed merger of Asda and Sainsbury’s has been published – with people raising varied concerns including the fact it could give rise to higher prices, reduced choice, or a loss of innovation within the supply of groceries.

In April, it was announced that Sainsbury’s was looking to acquire Leeds-headquartered Asda, creating a £51bn-revenue grocery giant through the merger of two of the UK’s largest ‘Big four’ supermarkets in a bid to respond to “significant and rapid” change in the sector.

The merger will result in Walmart holding 42% of the issued share capital, receiving £2.9bn cash; valuing Leeds-headquartered Asda at £7.3bn.

The CMA has shared initial submissions it has received from parties including other supermarket groups, wholesalers, suppliers, trade associations, not-for-profit organisations with an interest in the groceries sector, local government representatives and members of the public.

The CMA said that many submissions put forward their views on the current landscape of the groceries market in the UK. Some described what they saw as recent trends in consumer practices, such as a move away from a ‘big shop’ to shopping ‘little and often’, and suggested how these might affect the way in which grocery retailers compete.

The dynamics of competition between different suppliers of groceries was also a factor, with some respondents saying that these different suppliers compete in different ways, depending on their customer focus, geographic reach and product and service offering.

However, other respondents said that customers may use different types of store for different shopping ‘missions’ or purposes, and therefore that some stores could be considered as complementary rather than alternative options for customers.
One respondent perceived Asda as a pricing ‘maverick’ – a company that plays a particularly disruptive competitive role in the market.

The CMA said: “A number of submissions raised concerns about the impact of the Proposed Merger at the national level, on the belief that it would lead to increased concentration in the market and fewer national players, with two companies – Tesco and the combined Sainsbury’s/Asda – holding high market shares.

“Some respondents suggested that this could give rise to higher prices, reduced choice, or a loss of innovation within the supply of groceries.”
Other respondents raised concerns about the impact of the Proposed Merger on competition at the local level and several submissions raised concerns in relation to the supply of online groceries, where some respondents suggested that there may be limited alternative options for customers, particularly in certain areas of the country.
Some submissions raised concerns that the Proposed Merger would give rise to a greater risk of tacit coordination – an understanding between competing firms when they recognise that they are mutually interdependent and can reach a more profitable outcome if they coordinate to limit their rivalry – within the supply of groceries.

Some of these submissions suggested that certain market conditions that could be conducive to coordination – in particular the ability of suppliers to monitor their rivals’ pricing – had increased in recent years, for example through online price comparisons and the increased use of price matching software.

Some submissions raised concerns about the impact on suppliers and the potential knock-on effects that this could have for consumers. It was also raised that the merger could provide the combined company with increased buyer power, which they said would allow it to negotiate lower prices with suppliers and/or to pass on excessive risks and unexpected or disproportionate costs to suppliers.

The consequences of this, said respondents, would be reduced margins for suppliers, suppliers having to charge higher prices to smaller retailers to recoup lost profits and reduced choice for customers.

Others raised the impact on employment should any store closures take place. However, the CMA stated: “When investigating a merger, the CMA’s mandate, by law, relates to assessing the potential impact of that merger on competition. This assessment is critical in ensuring that consumers are able to benefit from the lower prices, better service, or greater choice that effective competition is able to bring about. Assessing the other potential effects of a merger, such as the impact that a merger could have on employment, falls outside the CMA’s statutory powers.”

The feedback gathered in the preliminary stages is the first part of the CMA’s information gathering process. A further ‘invitation to comment’ will be opened once the CMA’s formal investigation is launched.

The CMA is also likely to proactively contact companies and organisations that are active in the markets affected by the proposed merger.

The CMA added: “Further opportunities to engage with the CMA’s investigation are likely to be provided by a consumer survey (to engage directly with the customers) and by a series of hearings and roundtable meetings with interested third parties.”

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