Analysis: Merger of Walmart's Asda and Sainsbury
Grocery retail has always been an intense battleground and nowhere is this truer than in the United Kingdom. A consolidated market with four giant players, the rise of online grocery services, and the dramatic growth of deep discounters have all conspired to erode margins and make market share gains extremely tough.
Against this backdrop, all players have been looking for ways to defend their positions and develop better economies of scale. The potential merger between Walmart's Asda and Sainsbury's is just the latest of these maneuvers.
From a scale perspective, a deal makes sense. The combined entity would have a 22% share of the U.K.'s food and grocery market. This is well above the share of the current leader, Tesco, which has 17.7%. Such a dominant position in grocery -- along with the combined non-food business which includes Sainsbury's Argos division, would create many opportunities for cost savings and buying efficiencies.
The deal is also genuinely additive in that Sainsbury's and Asda have different market positions both geographically and in terms of the demographics they serve. There is some overlap, but it is far more minimal than that between, say, Sainsbury's and Tesco.
However, in our view both of these advantages also create problems.
On the scale front, any deal would require approval from competition authorities. Given the highly consolidated market, it is likely that scrutiny would be high and an investigation prolonged. Furthermore, we believe that even if a deal was ultimately permitted, it may be subject to remedies such as store disposals and other measures which would be disruptive.
The differences between the two groups make a true merger almost impossible. Although it could be combined corporately, we believe it would be folly for the new entity to completely merge operations and brands. This limits the scope for savings and efficiencies and, if anything, adds complexity.
Aside from any synergies which are helpful to the bottom line, we also question how Sainsbury's intends to generate growth from Asda. Walmart, which has scale and financial power on its side, struggled with its U.K. arm for years. While things now seem to be stable, it is hard to conceive what Sainsbury's brings to the table that will drive growth to a new level.
These negative factors mean a deal is far from done. In our view, they also indicate that this is a defensive play. As necessary as they can be, moves made in defense are not always the most creative or sensible.
Against this backdrop, all players have been looking for ways to defend their positions and develop better economies of scale. The potential merger between Walmart's Asda and Sainsbury's is just the latest of these maneuvers.
From a scale perspective, a deal makes sense. The combined entity would have a 22% share of the U.K.'s food and grocery market. This is well above the share of the current leader, Tesco, which has 17.7%. Such a dominant position in grocery -- along with the combined non-food business which includes Sainsbury's Argos division, would create many opportunities for cost savings and buying efficiencies.
The deal is also genuinely additive in that Sainsbury's and Asda have different market positions both geographically and in terms of the demographics they serve. There is some overlap, but it is far more minimal than that between, say, Sainsbury's and Tesco.
However, in our view both of these advantages also create problems.
On the scale front, any deal would require approval from competition authorities. Given the highly consolidated market, it is likely that scrutiny would be high and an investigation prolonged. Furthermore, we believe that even if a deal was ultimately permitted, it may be subject to remedies such as store disposals and other measures which would be disruptive.
The differences between the two groups make a true merger almost impossible. Although it could be combined corporately, we believe it would be folly for the new entity to completely merge operations and brands. This limits the scope for savings and efficiencies and, if anything, adds complexity.
Aside from any synergies which are helpful to the bottom line, we also question how Sainsbury's intends to generate growth from Asda. Walmart, which has scale and financial power on its side, struggled with its U.K. arm for years. While things now seem to be stable, it is hard to conceive what Sainsbury's brings to the table that will drive growth to a new level.
These negative factors mean a deal is far from done. In our view, they also indicate that this is a defensive play. As necessary as they can be, moves made in defense are not always the most creative or sensible.