Does ASDA’s blocked merger with Sainsbury’s make sense?
The Competition and Markets Authority (CMA) has put the brakes on ASDA and Sainsbury’s becoming the dominant force in supermarket retail.
Dr Jon Seaton examines whether the argument against the deal is justified?
A lot has been happening in retail recently, writes Dr Seaton, but consumers were understandably shocked by the decision of UK regulators in rejecting the merger bid by Sainsbury’s/ASDA.
They had given in to so many other mergers (Morrison’s/Safeway, Sainsbury’s/Argos, Tesco/Booker, Ocado/M&S, Morrisons/Amazon) that this rejection was so unexpected.
They are the real anomaly and would have been enormously challenged by a Sainsbury’s-ASDA merger in both market share and prices of grocery retail and petrol.
Mind the gap!
Looking at the recent market share information from Kantar Worldpanel Tesco dominates the industry with a market share of 27.4%
The next best is ASDA (15.4%) – followed by Sainsbury’s (15.3%). Together Sainsbury’s and ASDA would command about 30.7% market share – if 30.7% is too much – then what about 27%?
This does seem a little petty of our regulators to say a gap between the largest and second largest of 12% is ok but a gap of just over 3% would be far too much!
The law of concentration
To put the CMA view into perspective, the reports and interviews over the last day or two have recognized a supposed law of economics, that as markets have fewer and fewer competitors – more concentration – then the prices charged by the firms with larger and larger market shares rises.
So, an industry with two massive companies would have higher prices than one with three firms and lower prices than a full on monopoly.
In theory, this idea holds up when you compare a market with a massive amount of equally sized firms to a monopoly, it’s just this does not exactly work out for the comparison of a few firms.
Indeed analysis of the grocery market by myself and co-authors from Warwick University and the University of East Anglia found the merger between Morrisons and Safeway actually led to a reduction in prices in the market!
So the law is only a theoretical law.
In practice, it falls flat on its face. Why? Well, when firms compete on price you can have as few as just two firms and they will be as competitive as a massive bunch of firms driving prices down to cost.
For example, I have also found in the past some price raising behaviour of Tesco has been mitigated by increased competitive practices from ASDA. Tesco needs a powerful adversary.
Choice and costs
Two other issues have been muted as a good reason not to go ahead with the ASDA-Sainsbury bid. They may have more relevance – that of decreasing choice and lack of cost reduction from a merger.
The main benefit from the Safeway-Morrison merger was a dispersion issue – Morrisons mostly distributed northerly merged with Safeway – much more spread out, but with much greater southern base.
So clearly distribution costs could be reduced, a greater national spread with both economies of scope and scale.
In the present context the opening up of new markets which Morrisons gained would not be the main gain for Sainsbury’s-ASDA – rather duplication might lead to shop closures – loss of jobs – and maybe a reduction of access and choice for the consumer.
Big box or small is beautiful
In an earlier blog, I indicated the strengths and weaknesses of the big box store format versus the smaller format favoured by the Lidl/Aldi chains when this potential deal was announced.
At Christmas the big box – department store approach is great – lots of choice – lots of possible substitutes if the favoured item is not in store. But with online shopping increasing, the big box format is suffering dramatically.
For modern consumers choice is large regardless of local or national store/retailer locations or merger behaviour – that’s what the internet does!
To some extent the CMA decision is a lost opportunity – they could have provided a worthy opponent against Tesco’s dominance of the UK grocery retail market but on the other hand it may not matter anymore to the petrol and grocery buying public – within ten or so years we will probably be buying everything from Amazon – who may buy up ASDA anyway – and it will likely be delivered by electric Uber or Tesla Robotaxis!
By failing to increase competition in the large format bricks and mortar grocery retail sector they may well have increased the chances of its early demise.
This Blog post was written by Dr Jon Seaton, Reader in Business Economics and member of the Accounting & Finance and Economics discipline groups at the School of Business and Economics. Jon can be reached on email@example.com