Sainsbury's in 'advanced' discussions over £10bn-plus merger with Asda to create supermarket giant
Alan Tovey
Updated
Sainsbury's supermarket
Sainsbury's is in talks about a £10bn-plus merger with Asda that could force the sale or closure of hundreds of stores across the UK to win the approval of competition regulators.
Sainsbury's confirmed it was in “advanced” discussions with US retail giant Wal-Mart, which owns Asda, about a tie-up, a move which see the combined business overtake Tesco as the market leader in Britain.
Such a combination would cause upheaval on the UK high street, creating what was described as a “game-changer of epic proportions” by one supermarket analyst.
However, with more than 2,000 stores between Sainsbury's and Asda, watchdogs are likely to demand widespread disposals of outlets to stop dominating swathes of the UK retail market.
Such an outcome raises questions about the future of thousands of staff, though it is understood the two companies are mulling the tie-up to be able to source stock more competitively, rather than to cut costs.
The move is understood to be in response to the radically changing retail landscape, with traditional giants facing pressure from online retailers such as Amazon, and recent entrants such as the Aldi and Lidl discount chains.
It is thought an agreement - which is expected to see both brand names retained - could be announced within weeks, though news leaking of a possible deal could hasten this.
Asda is owned by US retail giant Wal-Mart
A combined Sainsbury's-Asda would have almost a third of the UK retail market, putting it ahead of current number one Tesco, which has a 28pc market share. According to data from retail analyst Kantar, Sainsbury's and Asda each have about 16pc of the market - and a combined business would have an annual turnover of £50bn.
Led by Mike Coupe since 2015, Sainsbury’s has about 150,000 staff and 1,400 stores - though more than half of them are smaller “convenience” outlets - with a bias towards locations in the south.
The chief executive - who had a stint at Asda in the early stages of his career - has previously made bold moves before which have shaken up the UK retail sector. One of the most notable was the £1.4bn acquisition of Argos and Homebase-owner Home Retail Group two years ago, which has seen Argos outlets put into Sainsbury’s supermarkets.
Asda has 165,000 staff and about 650 stores, almost all of them supermarkets or superstores, with a focus on the north of England. The business is headed by Roger Burnley, who took the helm in January, and was previously retail and operations director at Sainsbury’s before being lured to Asda in 2016 as deputy chief executive.
Any tie-up would almost certainly attract scrutiny from the Competition and Markets Authority (CMA) watchdog, with it likely to demand concessions such as the sale of hundreds of stores to approve a deal.
Sainsbury's chief executive Mike Coupe has made bold moves in the sector previouslyCredit: Graham Flack
Retail analyst Nick Bubb said that the creation of a new retail giant through a merger would have been “unthinkable” until recently.
“The CMA had a reputation as being notoriously picky but the rules seem to have changed with the Tesco-Booker deal,” he said. “That getting waved through must have pushed Sainsbury’s and Asda to get their thinking caps on.”
Mr Bubb said it was likely that store disposals would be required to get a deal over the line but added the each of the chains’ North-South focus could make this easier for the regulator to stomach.
Established supermarkets are coming under huge pressure from online retailers and Amazon in particular, which is moving into the grocery sector. The entrance of discounters such as Aldi and Lidl to the UK has further ramped up competition, as their bargain prices lure away shoppers.
Discounters such as Aldi and Lidl are changing the retail landscapeCredit: Alamy
Sainsbury’s and Asda joining forces would further increase their scale, allowing them to negotiate better deals with suppliers.
Mr Bubb added: “A merger could create some good synergies on non-food sales, which Asda is bigger on than Sainsbury’s.”
Richard Lim, of retail Economics, added: “The newly formed retailer would be able to drive improved efficiency through cost-saving synergies, while the integration of Argos across a significantly larger store estate could 'supercharge' the non-food business.”
The tie-up would knock current market leader Tesco into second placeCredit: AFP
If a deal does go ahead, it could trigger a high street price war as well as drive further consolidation in the sector that could radically alter Britain’s grocery market.
“Asda has never had a problem with pricing but Sainsbury’s could reduce theirs,” Mr Bubb said. “This will put huge amounts of pressure on Morrisons and Waitrose, who will be much smaller in comparison.”
Highlighting the troubles established players in the UK grocery market face, Asda said 800 positions were at risk just before Christmas, while in January Sainsbury's said thousands of jobs were likely to go following an overhaul of its store management roles in a cost-cutting drive.
The grocer would not confirm how many jobs would be lost by the process - announced just 24 hours after rival Tesco revealed a similar move that would affect 1,700 jobs - but said that the number of senior roles at its larger sites and convenience stores would be reduced.
Although it is not known how a deal would be structured - though it is thought that Asda is likely to be reversed in Sainsbury’s with Wal-Mart taking a chunk of the combined business along with FTSE 100-listed retailer's shareholders - the tie-up looks to mark the end of a chapter in a remarkable UK adventure for the American retail giant.
Asda is owned by Wal-Mart, the world's largest retailerCredit: AP
Wal-Mart bought Asda in 1999 for £6.7bn, beating off competition from Kingfisher in a fierce bidding war for the Leeds-headquartered supermarket chain, which was founded by the Asquith family and merged with Associated Dairies in 1965.
At the time, the deal caused fear across the UK supermarket sector, with worries that domestic players would be crushed by competition from Wal-Mart. The US business is the world’s largest retail chain, and had sales of $500bn last year.
However, the UK market has proved difficult to crack, despite Asda having the backing of the US behemoth.
Asda’s most recent annual results - posted in August - revealed the retailer had suffered its worst year since being taken over by Wal-Mart, with sales falling to £21.6bn from £22.3bn, and pre-tax profit off by 19pc at £791.7m, according to accounts filed with Companies House.
