MarketLine Blog

CMA blocks Asda Sainsbury’s merger: Ending merger will stifle competition and dissuade future investment

On Wednesday, April 25th 2019 the Competition and Market Authority announced that the proposed merger deal between leading supermarket food retailers, Sainsbury’s and Walmart-owned Asda, would not go ahead. Despite being expected, the decision has shook investors; Sainsbury’s share price fell to a near three-year low on the day of the announcement. It leaves Sainsbury’s CEO Mike Coupe in the unenviable position of having to come up with a strategy for the future of the company as a solo act, a situation made tougher having already invested so much into the planned merger.

The UK grocery market is incredibly saturated at present, with growing levels of direct competition displaying just how little spare demand there is. The rise of supermarkets that compete on price above all else – Aldi and Lidl being the two dominant forces – has shaken the structure of the market with the major players shedding market share to these newcomers. Aldi and Lidl have managed to capitalize on rising consumer desire for cheaper alternatives. Their growth has left other players nervous and fighting to be heard in a busy market.

Choosing to block the merger was incorrect: allowing the deal would have enabled the two companies to combine forces, and better compete with the likes of Aldi and Lidl on price, while investing in expanding presence and retaining quality to compete with market leader Tesco.

Concerns from the CMA regarding reduced competition and price increases are understandable but are unfortunately off the mark. Given the composition of the grocery market at present, customers are the kingmakers and had the merger been allowed to go ahead the customers would have decided if the new venture was providing enough good to the market. If the newly-formed company had failed to provide what was promised, and had subsequently proved the CMA correct, then customers would simply stop shopping there and the venture would fail.

The decision has taken the power out of the hands of the customers and the group should have instead trusted in the free market principles on which much of the UK economy is based. The most successful supermarkets will always thrive, and those that make the wrong decisions and contribute to increased price levels will always fail eventually.

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