The proposed £12 billion merger between Sainsbury’s and Asda Group has been referred for an in-depth investigation by the competition watchdog.
The Competition and Markets Authority (CMA) says the deal raises sufficient concerns to be “referred for a more in-depth review”.
The merger of Sainsbury’s and Walmart-owned Asda would create a supermarket giant even bigger than Tesco.
The CMA says in a statement: “The companies are two of the largest grocery retailers in the UK and their stores overlap in hundreds of local areas, where shoppers could face higher prices or a worse quality of service.”
The watchdog adds it has moved to the second stage of the review, led by an inquiry group from the CMA’s independent panel members.
It will also investigate issues relating to fuel, general merchandise such as clothing and increased buying power over suppliers.
A statement setting out in detail the issues for review will be published in the coming weeks.
Issuing a joint statement, Mike Coupe, group chief executive of J Sainsbury PLC and Roger Burnley, president and chief executive of Asda, comment: "We expected the CMA would want to undertake an in-depth review and look forward to engaging with the CMA and Panel on this next phase of the process.”
Sainsbury's and Asda may have to sell stores to complete deal
Commenting on the investigation, Laith Khalaf, senior analyst at Hargreaves Lansdown says: "There was never a realistic chance that two such big players in the UK grocery space were going to be allowed to combine without a deep dive by the competition authorities. This doesn’t mean the deal won’t go through, but is likely to mean that the combined group will need to shed some of its store estate in order to push the merger through.
"Price competition from the discounters Aldi and Lidl, combined with changing shopping habits and the margin squeeze from weaker sterling have all contributed to a period of reinvention for the UK supermarkets. Indeed it was only two years ago Sainsbury's took over Home Retail Group to boost its prospects, by integrating Argos within its store estate."
The CMA says members of the public and other interested groups will be invited to give their views on the investigation, which is expected to be completed by 5 March 2019.
According to data analysis firm Kantar Worldpanel, the deal would give the merged group would have over 2,800 stores and market share of 31.4%.
Sainsbury’s and Asda have both said that customers would get a 10% cut in the price of products if the merger goes ahead.
Concern over emergence of 'duopoly'
It is hoped that lowering prices will help stave off competition from discount retailers such as Aldi and Lidl, which have gained market share in recent years.
However, there are concerns that the merger between Britain’s second and third largest supermarket groups could lead to the emergence of a duopoly, leading to higher costs for suppliers and reducing competition.
Retail analyst Richard Hyman says it is not clear how the deal will benefit consumers as it could lead to “a reduction in choice”.
He says: “The chances of prices going up are pretty slim as the competition won’t allow higher prices.
“Aldi and Lidl are only going to get bigger as they increase in popularity and they are going to keep prices low. A vast majority of retailers also advertise the same prices across the country, so a price rise in certain areas would be impractical.”
He adds: “It is quite right the merger is being investigated by the CMA as is necessary to make sure markets behave in the interest of the consumer. In order for the merger to go ahead Sainsbury’s and Asda will probably have to close a number of stores.”
However, Mr Khalaf strikes a more positive note: "There are clear benefits from the two supermarkets joining forces, particularly when it comes to leveraging their combined buying power, which should result in both lower prices for customers and higher margins for the business. Sainsbury's expects better buying terms to generate £350 million of efficiencies, while also lowering shop prices by 10% on some popular items.
"If the deal goes through, the prospect of Sainsbury, Asda, and Argos working together, with Walmart chipping in too, is a pretty powerful combination. It would also be good for consumers, who can expect lower prices as a result."