Sainsbury’s and Asda safeguard future from Amazon threat with proposed deal

Sainsbury’s proposed tie-up with Asda to create a leading grocery, general merchandise and clothing group with 2,800 stores and combined revenues of £51bn, will provide the scale to fend off the threat posed by Amazon in the UK supermarket sector, analysts believe.

Sainsbury’s confirmed its plans to combine with Asda-owned Walmart today (30 April 2018), two days after revealing merger talks were at an “advanced stage”.

According to Euromonitor International, the merger of Sainsbury’s and Asda would give the companies a combined 24% value share of the grocery offline market, ahead of Tesco, which currently leads with 22%. It’s a good strategic fit with Asda’s strong presence in the North of England and Sainsbury’s dominating the South-East, Euromonitor International added. However, for Philip Benton, the research company’s lead analyst, it’s also a tactical move against the online giant Amazon. “What is clear from the proposed deal is that Sainsbury’s and Asda are very aware of a potential Amazon acquisition in the UK supermarket industry, which is why they are looking for scale in order to safeguard their future,” he said. “They also concerned at being able to maintain price competitiveness with discounters Aldi and Lidl also continuing to eat at their market share. It would certainly be the biggest merger in UK retail history and be of grave concern to their number one rival Tesco.”

For Terry Hunter, UK managing director, Astound Commerce, the proposed Asda/Sainsbury’s merger is also clear statement to the retail industry. “The potential deal shows that the two chains feel they will be stronger together as they reposition themselves to combat the growing threat from the low-cost German supermarkets and Amazon,” he said. “The likes of Aldi and Lidl have made huge strides in recent years to take market share away from the ‘big four’ supermarkets as their budget offerings have connected with shoppers on an unprecedented level.

“Added to this shift in the retail marketplace is the elephant in the room that is Amazon. The retail behemoth added to its armoury with the Whole Foods acquisition and, potentially more worryingly, the opening of the retailer’s first checkout-less store earlier this year. The ‘big four’ have nervously watched on as Amazon has touted the idea of opening similar stores in the UK – they will know that the US retailer will be able to outmanoeuvre them and undercut them every step of the way. Morrisons has tried to get ahead of the game by partnering with Amazon to help it fulfil online grocery deliveries – further proof that that supermarkets are having to adopt new strategies to fend off the competition,” Hunter said.

Meyar Sheik, CEO at the multi-channel personalization platform for brands and retailers, Certona, suggested the Asda/Sainsburys merger shouldn’t come as a huge surprise. “It’s a safety measure for the brands, with ‘affordability’ having been redfined by Aldi/Lidl and Amazon’s encroachment on the grocery space significantly upping competition,” he said.

Catherine Shuttleworth, CEO at the shopper marketing agency, Savvy, agreed this move or similar looked inevitable: “We were always expecting something to happen to consolidate the grocery market,” she said. “The middle ground has been squeezed the most by the inevitable march and expandability of the discounters. A reinvigorated Tesco with Booker under its wing is less arrogant and more relevant, with support from suppliers and conversion with shoppers; so the potential of Sainsbury’s and Asda joining forces creates a new dimension for the UK grocery market. Whilst it’s unclear what form this merger may ultimately take it was always necessary to consolidate to survive. Could this be the catalyst for Amazon to make a real move?”

Sainsbury’s, the UK’s second largest supermarket, said the combined business will create a dynamic new player in UK retail with an outstanding breadth of products, delivered through multiple channels.

Under the terms of the deal, both the Sainsbury’s and Asda brands will be maintained. Walmart will become a long-term shareholder and partner with a 42% stake in the combined business, which will be chaired by the Sainsbury’s chairman and led by the Sainsbury’s CEO and CFO.

Asda will continue to be run from Leeds with its own CEO, who will join the Group Operating Board of the combined business. Two Walmart representatives will join the Board of the combined business as non-executive directors.

Sainsbury’s said there were no plans to close stores, as a result of the deal but rather the enhanced scale and stronger balance sheet would deliver a great deal for customers and that it expects to lower prices by around 10% on many of the products customers buy regularly.

Mike Coupe, CEO of Sainsbury’s, said: “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. It will create a business that is more dynamic, more adaptable, more resilient and an even bigger contributor to the UK economy. Having worked at Asda before Sainsbury’s, I understand the culture and the businesses well and believe they are the best possible fit. This creates a great deal for customers, colleagues, suppliers and shareholders and I am excited about the opportunities ahead and what we can achieve together.”

Judith McKenna, president and chief executive officer of Walmart International, said: “This proposed merger represents a unique and bold opportunity, consistent with our strategy of looking for new ways to drive international growth. Asda became part of Walmart nearly 20 years ago, and it is a great business and an important part of our portfolio, acting as a source of best practices, new ideas and talent for Walmart businesses around the world. We believe this combination will create a dynamic new retail player better positioned for even more success in a fast-changing and competitive UK market. It will unlock value for both customers and shareholders, but, at the same time, it’s the colleagues at Asda who make the difference, and this merger will provide them with broader opportunities within the retail group. We are very much looking forward to working closely with Sainsbury’s to deliver the benefits of the combined business.”