Retail never stops surprising us. This huge deal has so many as yet answered question. A deal involving Asda is less of a surprise in itself. Readers of my premium content will have read less than 2 weeks ago my analysis of where the market is going and the consequences: ” It looks very much like Asda will be the biggest casualty. Don’t discount corporate activity in UK supermarkets.” What I didn’t foresee was it would happen so fast and would involve Sainsbury’s.
We will know more tomorrow when JS makes a formal announcement to the market. The CMA is clearly an issue. On the face of it, this should not be allowed. However, nor should Booker/Tesco, so some think that has opened a door. I’m not sure why that should be, but the CMA is not famous for logic, consistency or its intimate understanding of its key constituency – consumers.
Will many stores shut, beyond whatever the CMA might require? Imagine a location with 6 supermarkets – the big 4 plus Aldi and Lidl. If the enlarged group shuts the Asda, what proportion of business will accrue to JS? I believe JS will get the smallest uplift. This is a function of target customers. The two businesses are very distinct. Moreover, many overlaps will involve a JS c-store and an Asda c20x bigger – again, chalk and cheese.
The key positives of the deal (beyond the obvious central cost-cutting) are potentially around non-foods and re-inventing Asda. This will create the UK’s biggest non-food retailer, overtaking Tesco. JS is already rapidly injecting Argos into Sainsbury’s stores. Eventually, Argos would be a key element of the Asda offer too. Argos stand-alones are already being shut and this deal would create many more opportunities to resite. On the food side, Asda’s value message has been progressively eroded by Aldi and Lidl. It needs to up its game in food and offer customers a reason to stay loyal. JS has the skills and know-how to strengthen Asda as a food retailer. Beyond foods, JS non-foods have been the strongest in supermarkets in recent times, so there is potential to up Asda’s game here too.
Two areas where benefits will be much more modest are price and scale. On price, there is still some denial in the sector. Aldi will not be beaten on price – end of story. And scale will not help here. Aldi has the price model and the mainstream players do not. On the wider question of scale, there is denial here too. One of the lessons of recent retail history is that being big no longer creates the economic and strategic benefits it once did. Smaller players have hoovered up loads of market share by being better, not bigger. Scale can be an impediment.
We are in the very early days of the restructuring of UK retailing. This will not be the last deal in supermarkets, and there will be much more in non-foods too. Watch this space.
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