Sainsbury’s/ASDA – 2 Become 1. Probably.

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By James Watson – 06 November 2018

The CMA must consider the wider picture in assessing this proposed merger.

Last week when the Chancellor Phillip Hammond completely failed to land a glove on the online retailers who are seen in some quarters as being the nemesis of the UK High Street, it was somewhat ironic that it emerged that Amazon plans to open a chain of 200 grocery stores across the country.

While the Competition and Markets Authority continues to fret about the proposed Sainsbury’s-ASDA merger, there’s a growing feeling that – while they are constrained by their remit – they are missing the bigger picture.

If Amazon is able to launch an assault on the UK grocery market and exploit its advantageous tax position to compete with the domestic supermarket majors – who are encumbered with both paying tax and satisfying the constraints of the CMA – then perhaps we need to think harder about what actually constitutes ‘competition’ in this sector.

The CMA is quite rightly concerned about how the ‘SASDA’ tie-up could impact suppliers and ultimately, the shopper, but this may pale in significance to the disruption that Amazon could bring to grocery shopping.

The real driver of the SASDA merger is the global buying power of ASDA’s parent company, WalMart, a defensive move protecting their business should a widely anticipated incursion from Amazon take place. This quest for scale is nothing new, it’s part of a wider worldwide trend in business that has accelerated in the post-digital era where no profit = no problem.

If Sainsbury’s and ASDA are permitted to join forces, their combined share of the grocery market would be just over 30% before any enforced store sales. In all likelihood it will settle to closer to Tesco’s current market share of 27.4%*. Either way, its lower than Amazon’s current significant 33.5% share of all UK e-commerce activity – and that’s before they enter the grocery sector.

It’s not for the CMA to factor in at this stage what the ‘Amazon effect’ might eventually be on the grocery market, but if it blocks the merger plans of two of the existing majors they could actually end up restricting the competitive environment they wish to maintain.

They may actually be paving the way for the entrance of a supermarket player who will be ideally placed to use extraordinary buying power to squeeze its rivals. At which point they will need to address the same question again; will that be in the long-term interest of suppliers and shoppers? Under the current tax regime, it certainly won’t be advantageous to the taxpayer.

To put this in context, the £675m that the Chancellor earmarked in his budget for the rejuvenation of UK High Streets is 150 times more than he received in Corporation Tax from Amazon last year.

Taking Aldi & Lidl into account in reaching a decision is a good start, but the CMA should also consider the wider, post-digital picture before reaching a conclusion.

*Kantar Worldpanel Grocery Market Share, Oct 2018