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Sainsbury and Walmart’s Asda to create grocery powerhouse
J Sainsbury Plc, the second largest U.K. supermarket chain, has agreed to acquire Asda, the third largest U.K. grocer, owned by Walmart.
The tie-up would be worth over £10 billion ($13.8 billion), making the combination larger than Tesco, Britain’s biggest grocery chain. Asda is expected to continue to trade under its own brand, separate from the more upmarket Sainsbury’s.
Both chains have been struggling with the aggressive expansion of Aldi and Lidl in the U.K., margin pressures bought on by Brexit and a rapid shift to online selling.
Walmart, which acquired Asda in 1999, is expected to own approximately 40 percent of the combined company, which will be led by Sainsbury’s CEO, Mike Coupe, who used to work for Asda.
Walmart has reportedly been looking to offload Asda for two years and the move would follow similar efforts to retreat from international markets. The deal also aligns with a recent shift to partner with local players in exploring overseas expansion, such as one with JD.com in China.
Asda has a sizeable non-food and clothing business led by its George label that could help Sainsbury, which also owns Argos home goods, better compete against John Lewis and Amazon.com. But having Walmart still involved will provide even greater clout with suppliers for the Sainsbury/Asda combination. Asda has lost its title as the low-price leader with the arrival of Aldi and Lidl.
Neil Saunders, managing director of GlobalData Retail and a RetailWire BrainTrust panelist, told CNN the combined entity would have a 22 percent share of the U.K.’s food and grocery market, well above the 17.7 percent share of Tesco. He said, “Such a dominant position in grocery, along with the combined non-food business which includes Sainsbury’s Argos division, would create many opportunities for cost savings and buying efficiencies.”
However, the decision to keep the nameplates separate will limit the possible synergies and some doubt the move will boost both chain’s value proposition.
“There’s undoubtedly some scale benefits in buying,” Bryan Roberts, an analyst at TCC Global, told Bloomberg. Still, a combined entity “doesn’t get rid of the problems both companies face. They still won’t be cheaper than Lidl or Aldi.”
Discussion Questions
DISCUSSION QUESTIONS: How would you assess the pros and cons of an Asda and Sainsbury’s merger? Does the deal make sense for Walmart?
Poll
BrainTrust
Paula Rosenblum
Co-founder, RSR Research
Cate Trotter
Head of Trends, Insider Trends
I suppose there are some opportunities on the buy side of the business, although given how large the original companies were, it’s hard to imagine there’s any margin left to squeeze….and the sell side just feels a little bit like a consolidation play, even with the different nameplates.
I am pretty convinced it was a good move for Walmart. For the buyer, I’m not so sure.
I agree, Paula — I am having a hard time seeing real value for the buyer, and I worry that the consumer will not benefit, either. I also question the strategy to maintaining two brand banners.
Walmart has encountered problems with many of its foreign acquisitions. Asda has been in trouble after losing its low-price moniker to Aldi and Lidl. Merging with Sainsbury will not solve the problem of a brand, Asda, without a message. To be successful, Asda needs to develop a stronger brand identity that resonates with consumers.
The deal is a great one for Walmart and part of a sensible wider strategy. They are able to divest part of a slower-growth division in exchange for £2.975 billion in cash and a 42 percent stake in a much larger entity. This cash can be put towards investing in higher-growth, higher-return initiatives such as Flipkart.
Meanwhile, the enlarged Sainsbury group will have scope to extract better prices from suppliers and create a more seamless omnichannel experience across all of its brands. The latter will likely help to boost sales, especially in non-food categories.
All that said, bigger does not automatically mean better. All of the competitive challenges of U.K. grocery remain and must be dealt with. And before any of that happens, getting the deal through the Competitive and Markets Authority will neither be easy nor quick!
Improving back office processes based on AI application is too often overlooked as a benefit of merger, where applying best practices in data-driven operations and marketing can show high returns on effort and investment. As Walmart will retain a significant ownership position, this can be seen as benefiting all parties.
Mergers, consolidations, and acquisitions are on the rise in the grocery arena. While at the surface, the Sainsbury acquisition of Walmart’s Asda seems like an outstanding fit, with large mergers of this scale comes additional complexity and an overall need to drive the brand messaging to further differentiate things.
The Asda team is facing increasing competition in the affordable grocery chains, such as Aldi and Lidl. However, as they have a more diverse merchandising offering outside of groceries, with the backing of Sainsbury, the company could further uniquely position the brand, compete with their diverse product offerings and scale.
Having lived and taught in both England and Ireland, I am very familiar with the changing food retail landscape in the U.K. There is no doubt that the extreme value retailers, Aldi and Lidl, have had a significant impact on the mainstream retailers. The key to this move is to generate operational efficiencies that can be applied to both retailers. I agree that the positioning of both retailers does not lend itself to the creation of a single banner. However, if both Sainsbury and Asda can take invisible costs out of the system, the savings may allow for a closing of the price gap between them and and the German retailers. The merger will improve the efficiencies of both retailers but one should not expect them to reach price parity with Aldi and Lidl. Instead both banners need to continue to focus on their differential advantages vis a vis the extreme value retailers.
Just musing … as of today both names will remain but, as of tomorrow? What if one sells food and the other everything else? Hey presto, no need to change name. And guess what? No competition.
Prices could possibly inch up again and who would notice (or be able to argue)?
As for squeezing suppliers, that almost goes without saying. Otherwise there isn’t really a way to improve prices (and gain customer loyalty) is there? And if those aforementioned prices do go back up again? Execs and shareholders sit back, enjoy and laugh all the way to the bank.
What could possibly be bad about this deal?
This proposal will undoubtedly be placed in front of the mergers and monopolies commission and if allowed to go through will almost certainly have several constraints attached possibly closing some stores to reduce their power. A merger of this sort will certainly bring with it some cost saving benefits in supply chain, supplier negotiations, senior management costs and even buying and marketing admin costs. However, if the proposal is to maintain the two brands then this will limit the benefits that could be made in the field and also much of the supply chain benefits and suppliers of own label items and the none core ranges.
The logic of the merger is to fight the discounters Aldi and Lidl, which have hit all the major supermarkets hard and in particular Asda who previously were the cut-price kings. Will the savings be enough to enable Asda to once again take on these operators or is the fact that Asda still operates out of large out of town stores still be the main issue as customers want to shop in more convenient local stores where Aldi and Lidl are based?
The nonfoods area offers a better opportunity as the buying power of Walmart combined with the Argos side of Sainsbury’s does give some real saving potential. This could be the answer to the large out of town stores, taking on the likes of John Lewis, B&Q and even Primark in the discounted clothing and nonfoods markets.
I’m sure Walmart is very pleased with the outcome of the deal, but like others I’m less sure about Sainsbury’s. I think the decision to keep the two names is interesting — perhaps they feel there could be oversaturation if all stores adopted one name? Keeping them separate may give customers a greater sense of choice, even if the ownership is the same. Some customers may be put off by one of the names which could be another reason for keeping them separate to ensure you appeal to as broad a market as possible.
I’m sure there’ll be some opportunities behind-the-scenes to leverage benefits, but whether they’ll be enough to counter the general challenges UK grocery retailers face is another question.
The usual concerns about culture clashes (I was reading about the Penn Central last week so probably have it on my mind) and differing marketing strategies (tho probably lessened by maintaining different name plates). It seems like a thoroughly predictable, if not necessarily successful, reaction to competition.