Asda and Sainsbury's merger fails to check out

The UK Competition and Markets Authority (“CMA”) have blocked the proposed merger between J Sainsbury plc (“Sainsbury’s”) and Asda Group Ltd (“Asda”) on the grounds that it would lead to price rises for consumers online, in store and in relation to fuel. Below we look at the reasoning behind the CMA’s decision and what it means for businesses considering a possible merger and/or potential acquisition.

Market Share
In Kantar’s latest market analysis, Asda and Sainsbury’s are, respectively, the second and third largest grocery retailers in the UK with the latest market shares being:

  • Tesco – 27.4%
  • Asda - 15.4%
  • Sainsbury’s – 15.3%
  • Morrisons – 10.3%
  • Aldi – 8%
  • Co-op – 6.1%
  • Lidl – 5.6%
  • Waitrose – 5%
  • Iceland – 2.1%
  • Ocado – 1.3%

Sainsbury’s currently operates 1,428 stores, 314 petrol stations, an online grocery business and general merchandise as well as financial services. Asda operates 641 stores, 321 petrol stations, an online grocery business, general merchandise and financial services. Sainsbury’s and Walmart (the owner of Asda) announced the proposed merger in April 2018 whereby Sainsbury’s would receive 58% and Walmart/Asda would receive 42% respectively of shares when the two companies merged. The merger would have resulted in Sainsbury’s and Asda together having a larger market share than Tesco and the next competitor in the market only having 10% market share.

CMA Investigation
The CMA investigation reached Phase 2, meaning an in-depth investigation was required as the Phase 1 investigation (the initial fact finding stage) found there was a chance the merger would lead to the “substantial lessening of competition” in the retail supply of groceries, online delivered groceries and supply of fuel.

The CMA noted that competition for in-store groceries tends to take place locally, rather than nationally. If the merger were allowed to go ahead, the CMA expected price rises, a reduction in products available as well as a poorer shopping experience for the consumer. In over 125 locations, the CMA predicated that due to the merger the price of fuel would increase where both companies’ petrol stations were located nearby. The CMA therefore decided that the only effective way to remedy the lack of competition was to prohibit the proposed merger from proceeding.

When discussing the potential issues arising from the merger, the CMA considered the increase in competition from stores such as Aldi and how further competitors may affect the market. Although competition from “discount stores” is increasing, it does not dispel the threat to competition the merger between Asda and Sainsbury’s posed. The potential increase in prices is likely to have been the major factor given the competitive nature of the grocery industry within the UK and the high barriers for entry to such a market.

The CMA reviewed responses from Sainsbury’s and Asda’s competitors during the consultation period.

Response to the CMA
Before the CMA’s final decision was announced, both companies had offered to sell up to 150 stores to alleviate the competition concerns.

Sainsbury’s and Asda claimed the merger would save shoppers £1 billion within three years however critics said this was unprovable. Mike Coupe, Sainsbury’s chief executive stated that the reason behind the merger was to reduce the price of goods for consumers.

Since the merger was prohibited Sainsbury’s have fallen to third in the supermarket market analysis. The chief executive of Asda, Roger Burnley stated the merger would have been beneficial for customers and expressed their disappointment in the CMA’s findings.

Conclusion
The prohibition from the CMA highlights the necessity of businesses contemplating a merger and/or acquisition to consider their overall market share (both before and after the proposed transaction) as the CMA will not hesitate to reject a merger if it will lead to a significant reduction in competition in the UK.

This article was co-authored by Rachel Gillan

Latest updates from @MacRoberts

  • Huge congratulations to Rebecca Cox in our Corporate Finance team who has been shortlisted for the Rising Star of t… https://t.co/sgIS8tsxej 2 hours ago
  • MacRoberts is delighted to be shortlisted at this year’s Scottish Legal Awards! We're up for Firm of the Year & t… https://t.co/LfaBwKCeXC 20 hours ago
  • Have you and your partner been considering moving in together? Are you aware of the legal implications that this ma… https://t.co/BCgW2nHnCR 29/07/2021
  • Following a consultation in 2019, the UK Government has outlined its intention to introduce a mandatory duty on emp… https://t.co/2XBrafRQ22 29/07/2021
  • Our award-winning Family Law team can help you and your partner through difficult situations by providing support w… https://t.co/sOwEmv13fP 27/07/2021
  • To celebrate the Olympic Games in Tokyo, we're delighted to launch our latest sporting challenge in support of our… https://t.co/Y8IEq3eT53 23/07/2021
  • MacRoberts is recruiting! We are currently looking for a Real Estate Planning Solicitor to join the MacRoberts tea… https://t.co/ioGQaF2hQc 23/07/2021
  • The countdown is on! With just 100 days to go, we’re looking forward to #COP26 in Glasgow! ♻️ As a firm accredite… https://t.co/Ooldhmo8tW 22/07/2021
  • Has lockdown led you to consider a move to the countryside? From discussing a possible purchase to obtaining the… https://t.co/patbF42pjk 22/07/2021
  • Have you seen our latest vacancies? 💼 We currently have opportunities in various departments across the firm. Fin… https://t.co/NpiWs2sphg 21/07/2021
  • Acas has published new guidance for employers with helpful information on #flexibleworking & #hybridworking. With t… https://t.co/SoX87hFkko 20/07/2021
  • Busting the myth that a career in law is only for the privileged few: @marikaflawyer is speaking at this morning’s… https://t.co/awfcub4cw0 19/07/2021
  • MacRoberts is recruiting! We are currently looking for a Support Services Assistant to join our team in Edinburgh.… https://t.co/DJ27fRmmdb 16/07/2021
  • MacRoberts is pleased to have been part of the team advising @HV_Systems in its £5m capital boost from Beehive Equi… https://t.co/BxcwjCgIVk 15/07/2021
  • MacRoberts is recruiting! We are currently looking for a NQ Solicitor to join our Conveyancing & Private Client te… https://t.co/zubGY4zo0D 14/07/2021