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Will Sainsbury’s-Asda merger be vetoed?

John Colley

“One can set aside the promises about job losses, lower prices, no store closures, and retaining the two brands. These are likely to be short term at best, perhaps a couple of years for some”. Contributor Professor John Colley, Associate Dean – Warwick Business School.

“The key issue for the CMA is, will enough competitive tension exist to force the new combined company to pass its savings to the consumer? The answer is unlikely for the current competitors. Whilst Aldi and Lidl have made good progress with their cost-based approach of smaller stores and a limited range, the buying power of the new combine should more than combat those advantages.

“In these circumstances the CMA response should be to turn down the bid. However the CMA uses economic models which consider local competition and are much more likely to approve the bid as a whole, but require store disposals where there is too great a local preponderance of the combine’s stores. These are likely to end up with Morrison’s, if they want them, or will close.

“The real concern for the industry is Amazon who operate an online delivery service for groceries in the London area. They have the resources and capabilities to become a formidable competitor across the country if they so choose. Their cost base would be much lower as they will not have store costs.

“Be clear, Sainsbury’s CEO Mike Coupe will not be offering a price reduction as a consequence of the merger, he will only do that if forced by competitor pressure. He believes that pressure is likely to come from Amazon and he would have to reduce prices irrespective of any merger.

“If Amazon is ineffective or chooses to focus its resources elsewhere then Mr Coupe really is ‘in the money’ if the CMA pass the deal. In effect the CMA’s main concern is a competitor that scarcely exists at present in the grocery market. They should turn down the deal to preserve competition and innovation otherwise the consumer will have very little choice indeed.”

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