February 20, 2019 / 1:46 PM / 3 months ago

Breakingviews - Walmart is smallest loser in UK supermarket salvo

Shopping bags from Asda and Sainsbury's are seen in Manchester, Britain April 30, 2018.

LONDON (Reuters Breakingviews) - Walmart may be the smallest loser in the UK supermarket shakeout. British competition watchdogs released a damning view on the 7.3 billion pound tie-up of J Sainsbury and Asda, owned by the U.S. giant. The verdict leaves both groups struggling to fend off discounters Aldi or Lidl. At least Asda has its parent’s global clout.

Higher prices and a poorer shopping experience – that’s what shoppers can expect from the creation of the UK’s biggest grocer, according to the Competition and Markets Authority (CMA). Both parties had hoped for a more lenient opinion than an initial review last year, as this one took account of the threat of Amazon, and the growing market share of the German discounters.

The CMA has not blocked the deal, but it now looks unappealing. The regulator reckons that competition could be a concern for supermarkets in 629 areas, nearly half of Sainsbury’s grocery business. The combined entity may need to sell so many stores that the benefits of the deal would be completely lost.

The battle may go to court, but both parties must already be thinking about alternatives. Either could try to do a deal with the fourth-biggest player, WM Morrison Yet bankers worry that the CMA’s hawkish approach may rule that out too, as it suggests that any merger between the large players will need to leave behind as many as 10 competing stores in some areas, according to one source close to the deal.

The news is a blow for Walmart, for whom the transaction looked like an elegant way to exit the UK. It could sell to a private equity firm, but there may be few takers, given the sector’s sluggish growth. The bad news does come at a relatively good time: Asda has enjoyed seven consecutive quarters of sales growth, thanks to its ability to offer cheaper own-brand products and drive bargains with suppliers. Having the might of a $290 billion owner helps.

That leaves Sainsbury’s in an awkward spot. A decline in its general merchandise business, inherited through the Argos purchase, made it the slowest-growing of the big four grocers over Christmas. And pressure from discounters will get worse, with Tesco and Morrisons launching cheap brands. Its best bet may be to scoop up smaller rivals, and use the savings to cut prices. That may still leave rivals scope to raid its shelves.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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