Supermarket giants Sainsbury’s and Asda have confirmed planned to merge, creating a ‘dynamic new player’ in the UK supermarket industry.
Sainsbury’s estimates prices on popular items could fall by 10%.
In a statement this morning, Sainsbury’s says the merger will bring enhanced scale and a strengthened balance sheet to the business at a time when the retail sector is going through ‘significant and rapid change’ as customer shopping habits continue to evolve.
It says: “Bringing Sainsbury’s and Asda together will result in a more competitive and more resilient business that will be better able to invest in price, quality, range and the technology to create more flexible ways for customers to shop.”
Following the merger, Walmart will hold 42% of the issued share capital of the combined business and will receive almost £3 billion. This means Asda will be valued at around £7.3 billion once the deal completes.
Combined, the supermarkets saw revenues of £51 billion in 2017 and will account for 31% of the market – the move would see them eclipse current market leader Tesco, which has a 28% share of the market.
They will bring together more than 2,800 Sainsbury’s, Asda and Argos stores and some 47 million customer transactions a week. The deal is expected to complete in the second half of 2019 although the Competition and Markets Authority says it is “likely” to review the merger to assess whether the deal could reduce competition and choice for shoppers.
It comes just two years after Sainsbury’s took over Home Retail Group, bringing Argos into its group, and weeks after Tesco completed its £4 billion takeover of wholesaler Booker.
Sainsbury’s shares soared 20% this morning as the deal was confirmed, while Tesco shares dropped 4% and Morrison’s were down 2%.
Mike Coupe, chief executive of Sainsbury's, says: “This is a transformational opportunity to create a new force in UK retail, which will be more competitive and give customers more of what they want now and in the future.”
Laith Khalaf, senior analyst at Hargreaves Lansdown, says greater buying power from the combined businesses should mean lower prices for customers and higher profit margins for the business.
It is hoped that lowering prices will help stave off competition from budget retailers Aldi and Lidl, which have gained market share in recent years. Recent figures from Halifax estimate discount supermarket spending has increased 23% a year since January 2013.
Mr Khalaf adds: “Sainsbury and Asda have clearly decided there is strength in numbers as they battle the headwinds currently buffeting the UK retail sector. If the deal goes through, the prospect of Sainsbury, Asda and Argos working together is a pretty powerful combination. It would also be good for consumers, who can expect lower prices as a result.”
Jo Causon, chief executive of the Institute of Customer Service, says that the move could lead to improved customer services for shoppers.
She says: “The merger of Sainsbury’s and Asda is an interesting move – currently both supermarkets serve different markets and customer bases. Curious customers will look forward to seeing whether the new offering can serve them both and what the key differentiator to other brands will be.
“With fierce competition among supermarket pricing and promotions, customers have a choice to switch or continue shopping in the same place. This is why service should be any supermarkets’ relentless focus as it can be the difference between loyalty or loss of customers.
“In the latest UK Customer Satisfaction Index, Sainsbury’s was rated the 39th highest-performing organisation, and Asda didn’t appear in the top 50 at all. With Aldi, Waitrose and M&S Food all ranking within the top 20, there is a clear window for the new merged retailer to shape a strong customer service strategy and earn its place among the ever-changing supermarket leaders for satisfying customers.”
Jonathan Buxton, partner at Cavendish Corporate Finance, says: “Hard-pressed supermarket suppliers will right to be concerned that they will face further customer concentration and pressure on their margins.”