British supermarkets Sainsbury’s and Asda were at the centre of a “shock” merger announced at the weekend which could result in the birth of a new industry giant. The deal would give them a 31% share of the market, overtaking the current leader Tesco.
The Competition & Markets Authority are likely to investigate whether the merger would “reduce competition and choice for shoppers”; with many stores in close proximity it is perhaps unlikely that they will all remain open as usual, resulting in job losses despite claims to the contrary.
For a number of years now, both supermarkets have been threatened by German discount chains Aldi and Lidl, whose business model has proved successful with British consumers. This significant merger may be the only way to out-muscle their steady market share gains once and for all.
But as we have seen with many high-street retailers, online services are also providing stronger competition. Online retailers like Amazon – with its Amazon Pantry brand – are gaining ground in the industry, offering consumers a combination of choice and convenience, further bolstered by the acquisition of Whole Foods last year.
This is one area where this new merger could prove successful; there are talks that Asda will incorporate the Sainsbury’s-owned Argos into some stores, diversifying stock and offering customers a more streamlined experience as a result.
But is it really surprising that supermarkets are re-thinking their strategy? The industry is becoming ever more globalised; big players cannot afford to take a back seat, especially if they are already having to fight off competition from abroad. What’s more, certain recent developments may have had a significant impact on the motives for this new merger.
Firstly, Tesco’s takeover of Booker earlier this year saw them consolidate their position as market leader and announce soaring profits earlier this month, leaving Sainsbury’s and Asda struggling to compete.
Secondly, the effects of climate change in the agricultural sector are becoming ever harder to ignore, with supermarkets hit by shortages of vegetables last year as a result of poor weather across Europe. Market leaders should arguably be preparing for more of the same and ensuring that they can cover the costs in order to avoid passing them on to customers.
Finally, with Brexit raising questions about agricultural policies and trade, it is not surprising that big players are concerning themselves with how they will perform in years to come. It is essential that British retailers are competitive not only on a national level but also on the world stage. With this in mind, the case of Sainsbury’s and Asda may be less about concerns over current trends and more about preparation for the future.
Monitor changes in the Supermarket Industry in the UK and around the world with our UK Supermarkets and Plimsoll World Grocery Stores reports. Follow the links for a free brochure or call 01642 626422 for more information.