The early findings of an in-depth investigation by UK Government watchdog the Competition and Markets Authority (CMA) into the proposed merger of supermarkets Asda and Sainsbury’s has raised extensive competition concerns over the potential tie-up.

The retail groups first confirmed plans to merge in April of last year. The deal, should it go ahead, would give the companies a bigger market share than Tesco and create one of the UK’s leading grocery, general merchandise and clothing retail chains, with combined revenues of GBP51bn (US$70.1bn) in 2017.

With more than 8m customers regularly buying its Tu clothing, Sainsbury’s is the sixth largest clothing retailer by volume in the UK. It hails a “strong” position in both the womenswear and childrenswear markets and says there are opportunities for future growth in menswear, which now accounts for 15% of clothing sales and is the retailer’s fastest growing clothing category.

If coupled with Asda’s successful George clothing line, the combined business could stand as a competitor to the likes of UK value clothing retailers such as Primark.

The merger, however, needs to be approved by the competition regulator and has already seen the CEOs of both Sainsbury’s and Asda grilled by MPs – with the two UK supermarket chains told the cost of the deal will likely end up falling on the groups’ suppliers.

In September, the Competition and Markets Authority (CMA) said the proposed merger could lead to a “substantial lessening of competition” in 463 areas across the UK.

Now the findings of its ‘Phase 2’ investigation into the potential deal have potentially identified “extensive competition concerns.”

In a statement today (20 February), CMA notes it has provisional concerns that the merger could lead to a substantial lessening of competition at both a national and local level. The combined impact means that people could lose out right across the UK and that the deal could also cost shoppers through reduced competition in particular areas where Sainsbury’s and Asda stores overlap, it adds.

“These are two of the biggest supermarkets in the UK, with millions of people purchasing their products and services every day. We have provisionally found that, should the two merge, shoppers could face higher prices, reduced quality and choice, and a poorer overall shopping experience across the UK,” says Stuart McIntosh, chair of the independent inquiry group carrying out the investigation.

“These are our provisional findings, however, and the companies and others now have the opportunity to respond to the analysis we’ve set out today. It’s our responsibility to carry out a thorough assessment of the deal to make sure that the sector remains competitive and shoppers don’t lose out.”

As a result of the findings, the CMA has set out potential options for addressing its concerns, including blocking the deal or requiring the merging companies to sell off a significant number of stores and other assets – potentially including one of the Sainsbury’s or Asda brands – to recreate the competitive rivalry lost through the merger. The CMA’s current view is that it is likely to be difficult for the companies to address the concerns it has identified.

The watchdog will issue its final report by 30 April.

“Hammer blow”

Richard Lim, chief executive of Retail Economics, notes the provisional findings “deliver a hammer blow” to the potential tie-up between Sainsbury’s and Asda.

“The scope of any potential recommendations in the final stage may be too much to swallow for the deal to survive” – Richard Lim

“Protecting the interests of consumers is paramount and the CMA chose not to mix its words with the second phase finding extensive competition concerns. The scope of any potential recommendations in the final stage may be too much to swallow for the deal to survive,” he says.

“There’s no doubt that the industry is amid a painful readjustment. Competition in the industry is fiercer than ever before and at the heart of this proposed deal is the need to drive further efficiencies through scale. What emerges between whom and when remains highly uncertain, but we expect plentiful conversations between retailers and wholesalers, wholesalers and symbols groups and even large-scale logistics companies.”

Meanwhile, GMB Union has moved to oppose the merger after what it called the “staggering” provisional findings from the CMA.

Tim Roache, GMB general secretary said: “The CMA provisional findings are staggering. GMB Union will absolutely oppose any merger that would see hundreds of stores and scores of depots put at risk. 

“People are waking up today worried about what this means for them. If this merger were allowed to go ahead, we could see thousands of jobs at risk in everything from stores and distribution, to head office and home shopping. 

“What’s often lost in talk of share prices and ‘divestment packages’ is that this is also people’s lives, livelihoods, and communities we’re talking about. The price shoppers and workers face paying for this merger is simply too high. 

“Our members – many of whom have worked at Asda for years, if not decades – will continue to support Asda in being the highly successful, standalone business it has been for generations, but it’s increasingly clear from the CMA announcement that isn’t compatible with the Sainsbury’s merger plan, which must now be blocked.”

A fundamental misunderstanding

In a joint statement, a spokesperson for Sainsbury’s and Asda says the CMA findings “fundamentally misunderstand how people shop in the UK today and the intensity of competition in the grocery market”.

“The CMA has moved the goalposts and its analysis is inconsistent with comparable cases,” the supermarkets claim. “Combining Sainsbury’s and Asda would create significant cost savings, which would allow us to lower prices. Despite the savings being independently reviewed by two separate industry specialists, the CMA has chosen to discount them as benefits.

“We are surprised that the CMA would choose to reject the opportunity to put money directly into customers’ pockets, particularly at this time of economic uncertainty. We will be working to understand the rationale behind these findings and will continue to press our case in the coming weeks.”