Sainsbury’s-Asda:
Decoding the largest merger in U.K. retail
By: Derya Yildiz and Ray Gaul
J Sainsbury plc, owner of Sainsbury’s supermarkets, Argos order-and-collect platforms, and Habitat home and furniture stores, announced in April plans to take operational control of longtime rival Asda from Walmart International. If the GBP7.3 billion merger clears competition authority and shareholder review, the new combined group will edge out Tesco as the largest retailer in FMCG categories and will have overwhelming leading shares in such nonfood categories as home goods, electronics, and clothing.
For branded suppliers, this merger will result in the U.K. market changing from the home of “the Big 4 supermarket groups” to three alliances of global multichannel operators. J Sainsbury’s alliance with Walmart will become the market’s No. 1 retail alliance followed by a new-look Tesco backed by Booker Wholesale and Morrisons’ very loose partnership with Amazon.
Implications for U.K. Retail
- The combined group will aim to create a new retail ecosystem to compete more effectively in the market, especially against pure players such as Amazon.
- This ecosystem will focus on differentiation through general merchandise and services, while offering the best grocery prices in the market through Walmart’s international procurement.
- Each format’s value proposition will be redefined and differentiated to leverage its unique strengths, cross-pollinating group brands in their stores.
- Asda’s expertise in big box and general merchandise will complement Sainsbury’s strong fresh offer and expertise in proximity retailing.
Implications for Walmart
- The merger signals a shift in Walmart’s international strategy and the changing role of the U.K. market. Asda had been Walmart’s innovation hub for many years, but now China is taking the lead on innovation.
- Walmart will seek to drive growth in profitable markets and drive innovation in others. The global giant is increasingly stepping away from less profitable operations, such as Asda, limiting its relationship to harvesting cash returns through volume procurement.
- Walmart may take its global portfolio of new services and innovative ventures to the U.K. market. Similarly, strong group brands, such as Argos, may be tested in the U.S. to stay competitive with Amazon.
The merger brings up several talking points and questions for the future:
Talking Points
Questions
The proposed new group is attempting to establish a dominant position in general merchandising retailing while stemming market share losses in FMCG. The hope is that this strategy will allow the group to invest in new service platforms related to digital shopping, on-the-go solutions, and more.
Is bigger actually better? It depends. On the one hand, if economies of scale matter, this larger scale will allow the combined company to fix important gaps more efficiently. On the other, any headaches that existed before the merger will become even bigger and more complex headaches after the merger.
The two main banners in the merger — Sainsbury’s and Asda out-of-town supermarkets — have historically been direct competitors. Management argues that these banners are actually largely complementary in terms of consumer reach, category strengths, and geographic overlap (Figure 1).
Is this retail apocalypse version 2.0 or “true synergy”? Will the group be forced to shut stores, send staff home, and ask for more patience from shareholders, or will it find a more efficient way to grow profits and top-line revenues?
The combined group is looking to put eCommerce at the heart of its strategy as the main connection point between retail brands. The new group will become the No. 1 online player from day one.
Will the group’s eCommerce team be the best-funded and most talented in the U.K.? Amazon’s ability to poach British talent has been astonishing, and Tesco’s teams are generally regarded as the best-funded. Will this change the dynamics in eCommerce?
Whether it is banking, credit cards, loyalty cards, or petrol services, the new company is hoping to provide services and solutions for British consumers.
Will Walmart’s pivot toward new services, as reflected in its proposed acquisition of U.S. healthcare provider Humana, usher in a new era of services for the U.K. as Walmart plays a new role as retail partner instead of retail owner and operator?
Figure 1. Combined Group’s Largely Complementary Catchment Areas
Source: Kantar Worldpanel
Kantar Consulting Point of View
This merger will impact suppliers on many levels. Here are eight key implications that suppliers should incorporate into their plans:
- Operational agility in transition will be essential. Operational integration of the two businesses will require brands to be agile and responsive to support the two retailers during this process. Packaging configuration requirements will be revisited and potentially streamlined. FMCG suppliers need to start building scenarios about how to integrate their Asda-Sainsbury’s operations.
- Global procurement will reshape negotiations. Walmart International’s procurement scale and expertise will be essential to delivering a promised 10% price cut on everyday grocery items. Assortment rationalization and range resets are expected. Supplier base consolidation will impact private label and fresh sourcing. For Walmart, pressure to drive productivity and profitability will continue.
- Winning in general merchandise will get a new emphasis. Looking beyond grocery to create new synergies, the combined group will leverage the general merchandise offer of both Sainsbury’s and Asda. Expect a stronger focus on winning key categories such as toys, apparel, and electronics. FMCG suppliers may face challenges with visibility, both in store and online.
- Services will become a differentiator. As the combined business aims to create a retail ecosystem, services will be essential for shopper loyalty. Online fulfillment, entertainment, banking, and other services (such as travel) will help to create value differentiation. Walmart may introduce its global services to the U.K. market.
- Look for the new business to leverage brands’ shopper insights. Sainsbury’s may extend its Nectar loyalty scheme to Asda to get to know the Asda shopper better. While aligning their value messaging, both businesses will need insight support from brands to retain existing shoppers and win new ones.
- Accelerated innovation will call for brand partnerships. Walmart’s global reach gives the combined business access to the latest and most disruptive innovation across the globe, especially from China. Brands are expected to be open to partnerships to test and learn new concepts, platforms, and services.
- Store refurbishments will leverage the total brand portfolio. Asda’s big-box stores may welcome Sainsbury’s general merchandise brands, such as Argos and Tu. Zoning and store layouts will change to serve the combined business in the best way while leveraging each format’s strengths.
- There are no excuses not to win in eCommerce. The combined business will aim to win against pure players such as Ocado and Amazon. Sainsbury’s can extend click-and-collect to serve Asda’s George brand as well as sell George on Argos. Suppliers will need to closely monitor online merchandising, sales, and category assortment strategies.