UK grocery groups Sainsbury’s and Asda have offered to sell off up to 150 supermarkets and 38 petrol stations in an attempt to persuade the competition watchdog that their £7bn merger should be allowed to go ahead.
The proposed closures are equivalent to only about half the number that the Competition and Markets Authority (CMA) has indicated may be required in order to gain permission for the merger.
It is also considering blocking the merger entirely or insisting on the sale of one of the supermarket brand names.
Commentators are now suggesting that the merger between the UK’s second and third-largest supermarket chains is doomed after the CMA warned last month that prices could be pushed up by the deal and reduce the choice and quality of products on sale.
For its part, Sainsbury’s has already said that it will offer price cuts to the value of £1 billion, funded by the projected £1.6bn of cost savings from its merger with Asda.
This would create a group with 2,800 supermarkets, convenience stores and petrol stations.
However, in a detailed version of Sainsbury’s and Asda’s official response to the CMA’s provisional findings published by the watchdog on Friday last week, the supermarket groups claimed that the sale of stores and petrol stations would give the opportunity for new entrants to come in or allow smaller rivals to expand rapidly.
Mike Coupe, the chief executive of Sainsbury’s, and Roger Burnley, the chief executive of Walmart-owned Asda, said in a joint statement: “We have asked the CMA to correct significant errors in its provisional findings. Its analysis fundamentally misunderstands how people shop today as well as ignores the intensity of competition and the dynamism of the UK grocery market, which evolves on an almost weekly basis.
“We have committed to £1bn of lower prices for customers within three years of our businesses merging and proposed a remedy package that would satisfy any reasonable concerns. We urge the CMA to properly reflect the evidence so that we can deliver savings for customers.
“We regret the uncertainty this process causes for our colleagues and want to reassure them that no stores would close because of this merger, with any divested stores run by a credible third party.”
RPA
Perspective
Taking doubts about the merger further, the CMA was too reliant on the use of
its Gross Upward Pricing Pressure Index (GUPPI) measure, according to experts
from consultancy firm AlixPartners.
GUPPI values below 5% are usually seen as unproblematic by the CMA, but in its Sainsbury’s-Asda investigation, the watchdog employed an upward pricing pressure threshold of just 1.5%.
Locations with a GUPPI higher than that were identified as areas where there is a competition risk. As a result, the CMA said in its provisional findings on the deal that there were 629 locations across the UK where there could be a “substantial lessening of competition”.
But AlixPartners said in its report: “We do not consider that setting upward pricing pressure thresholds at 1.5% for both groceries and fuel is appropriate to identify whether there is a SLC (substantial lessening of competition) in local groceries and fuel.”
It added that: “Without this, future mergers may be deterred, even if they generate material pro-competitive efficiencies to the benefit of consumers. Many retailers are facing challenging market conditions, and merger efficiencies may be important to their survival and their ability to deliver value to consumers.”
The CMA is due to publish its final verdict on the deal by 30 April.
