At least 75 Asda stores could close in merger of Asda and Sainsbury’s, handing market share to Tesco, says GlobalData
The two grocery chains are set to merge in a deal which would create Britain’s largest supermarket chain, with a combined market share in food and grocery of 23.3 per cent, just ahead of Tesco’s 22 per cent on GlobalData’s 2018 estimates.
But Patrick O’Brien, UK retail research director with GlobalData says he believes that any proposals to close stores would hand market share to Tesco.
“Sixty-six per cent of Asda shoppers also shop at Tesco versus 53 per cent who also shop at Sainsbury’s. So Asda shoppers are more likely to shop at Tesco or Aldi than Sainsbury’s. One in two of Sainsbury’s shoppers also shop at Asda versus 72 per cent who also shop at Tesco. So again Sainsbury’s shoppers are more likely to shop at Tesco than Asda.”
O’Brien says this shows the risk of the merged entities shutting stores, at the behest of the Competition and Markets Authority (CMA), which will have to sign off on the deal.
‘‘Overall, we see this as a defensive merger, as a way of halting the long term decline in profit margins both have suffered. Aldi and Lidl continue to take market share, and Asda and Sainsbury’s may believe that by combining to become the largest UK food retailer, it can battle more effectively against them with greater buying scale.”
O’Brien says the deal would be attractive to Asda as its low-price stance has been undermined by the German discounters, and it has been unable to position its brand or customer experience as offering more than the discounters. Rivals Tesco and Morrisons have been able to do so, because they never traded on being the cheapest.
“However, I don’t think we should get carried away with Asda Sainsbury’s talk of price cuts. The wording of the statement makes it clear that it will aim to reduce prices on some products – its less a commitment to a price war than an attempt to convince the CMA that the deal is good for competition.”
He says Sainsbury’s has largely succeeded with its acquisition of Argos so far, but to take on an even more challenging integration so soon after looks risky.
“We believe that fighting the increasing challenge of the discounters will require more than just cost cutting and increasing buying scale. Tesco was reported in February to have been planning a cut-price fascia to go head to head with the discounters. Sainsbury’s may be considering using the Asda fascia to play a similar role, though this would have to involve pushing the brand much further into more convenient locations.”
‘While there are no plans to close any stores at this time, regulators will be looking to see how many Asda stores are in close proximity to Sainsbury’s stores,” argues O’Brien.
“Our initial research found that while almost half Asda stores had a Sainsbury’s in the same postal district (the first half of the postcode, known as the ‘outcode’), many of these were Sainsbury’s Local stores, which arguably could be excluded as they serve a different shopper mission. Taking these out leaves 197 Asda stores, however this is not definitive as stores in different postcodes can be geographically very close, and some stores in the same postcode district could, feasibly, be far away enough not to be considered competitors. Looking at it by the smaller postcode sector (the first half of the postcode plus the first digit of the second half), 75 Asda stores have a Sainsbury’s (excluding Locals) in the same sector. We think these 75 stores would be the absolute minimum that the CMA will want disposed of.”