Shopping trends mean blocking the big Sainsbury’s-Asda merger may not protect customers, says Professor Yasemin Kor of Cambridge Judge Business School.
The proposed merger of supermarkets Sainsbury’s and Asda is now off the table as the regulator has ruled against it, saying it would lead to higher prices for
consumers. The merger would have created the largest supermarket in the UK in
an already concentrated market where the market shares of the top four players
add up to a whopping 68 per cent of the total market.
Under any other
circumstance, it would have made a lot of sense to block a merger of this
scale. But given the conditions at this time in food retail, stopping this deal
won’t necessarily protect customers. There is fierce competition in the
industry, ruling out the possibility of increasing prices.
Supermarkets have been
hit by multiple disruptions in the past couple of decades, and the
traditional way of shopping for groceries in big stores has been declining,
replaced by discount stores, convenience stores, and online shopping.
The biggest challenge
comes from the new discounters like Aldi and Lidl. They put even the
traditional UK discounters such as Wal-Mart’s Asda to shame with their
hard-to-match low prices. The Aldi phenomenon has swept through the UK. It has
opened numerous new stores since 1990, luring customers with aggressive prices,
good quality products, and advertising that trumpets blunt price comparisons.
Among several factors that drive Aldi’s cost advantage is its no-frills, small store format, stocked mostly with own brand products. This gives the company the ability to work with and negotiate the best prices from their long-term suppliers. Further savings are made by having customers do some of the work, such as opening boxes and taking carts back. And the product selection is very limited, with one or two choices for most products. These days, Aldi and Lidl are no longer underdogs. Together, they command over 13 per cent of the market, as the fifth- and seventh-biggest players in UK. Their model is the antithesis of the mainstream supermarket business model, which is based on a large variety of products, alternative brand choices, customer service, and in some cases store ambience and experience.
While the traditional
supermarket model hasn’t entirely lost its appeal, consumer expectations and
shopping habits have changed in multiple ways. Today’s consumers prefer lower
prices, but they also want high quality fresh produce and other products. They
value convenience in shopping, but they also shop in multiple stores to get
what they want. Increasing numbers are shopping online. But supermarkets still
haven’t figured out the best way to respond to these disruptive changes.
When customers shop
more locally and frequently, the large-format supermarkets outside of town and
city centres no longer generate enough sales. The grocery business is a
high-volume, low-margin trade where steady customer traffic matters. Without
high sales volume and fast inventory turnover, supermarkets cannot cover their “fixed
costs” like rent, technology and staff. Opening new convenience stores
helps to reclaim the lost business but doesn’t compensate for diminishing large
When it comes to the
steady growth of online food shopping, all major players offer this, but they
often rely on the click-and-collect method, which has marginal profitability due
to added labour costs. Highly-automated fulfilment centres are more efficient,
but they require substantial investments upfront.
Adding up the loss of
sales to convenience, discounters, and online, many traditional UK food stores
are suffering from reduced profitability.
Enter the Sainsbury’s-Asda
merger. This was a bold and risky move as it would have increased both
companies’ exposure to retail disruption. But it would have also given the
merged companies a stronger base to respond to discounters and the online
firms have much better profit margins than supermarkets. So increasing their
power against key suppliers is one way supermarkets are trying to survive.
While this may not have enabled either company to match Aldi-Lidl prices, they
could have narrowed the gap.
planned to leverage Asda stores for Argos pickups, a catalogue retailer owned
by Sainsbury’s. This would have helped them better use their big stores, while
expanding the reach of Argos. Plus, a combined response to online sales would
have created significant economies of scale when investing in the necessary
infrastructure to meet customer demand for online shopping.
So blocking the
Sainsbury’s-Asda deal may strengthen the hands of Aldi and Lidl. Perhaps that’s
good news as they can grow and make their low prices available to more
customers. But there may be other implications.
Customers today enjoy
having the luxury of shopping at different types of stores. A rapid rise of new
discounters and online models may not allow enough time for supermarkets to
adapt and traditional store options may fade away as a result, reducing options
for consumers in the future.
Even if they survive, an increasingly singular focus on price competitiveness and cost cutting can have other consequences. It can harm farmers and food producers with little power to negotiate, leading to the loss of small and midsize farms or putting added pressure on the environment and farm worker health. Plus, food quality may suffer under pressure to rapidly cut costs. Aldi and Lidl have managed to achieve good environmental standards along with efficiency by working with their suppliers over a long period of a time, albeit for a relatively narrow range of products. If other players are pushed to match the cost advantages for a substantially larger range of products in a short time period, compromises in other important areas can happen. So more competition may not turn out to be better for consumers after all.