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Mergers: The market share

24 July 2018 by Anthony Hilton

Mergers: The market share

Sainsbury’s bid for Asda is perhaps naïve in its optimism

You would have thought the Morrisons deal for Safeway more than 10 years ago would have put paid to analysts and investors wanting another supermarket bid. It caused massive upheaval in systems, in logistics, in stock – indeed, there was almost nothing which was not disrupted. The disruption even applied to the company’s eponymous founder, Ken Morrison, who was eventually forced to step down. The combined group took five years to right itself.

It is true that some things Morrisons brought about themselves. Much of what was good in Safeway was unceremoniously binned. They then spent several years trying to make things work and, when they did not, had to reinvent the old processes. Essentially, it was just too big.

Sainsbury’s bid for Asda may be a different story, but it has a lot of similarities. Sainsbury’s has predominantly focused on the south; Asda is headquartered in the north. Sainsbury’s is historically upmarket; Asda is historically more downmarket. Sainsbury’s was predominantly food, whereas Asda used half its space for clothing – although here, Sainsbury’s has diversified. It had to: food at Asda is much cheaper because of the higher mark-up of non-food. Above all, the combined business is truly vast.

Some executives have worked in both companies and think it will be easy to integrate the operations; the foot soldiers, who have more in common with the everyday shopper, have doubts. Sainsbury’s had taken over Argos, the home shopping business, relatively easily and it may have given them a thirst for more, but Asda is a whole different game.

Many businesses fail on mergers. When they succeed, it is because the target is small, the integration is straightforward, the acquisition close at hand and nothing is done to harm the culture of the acquiring firm.Sainsbury’s has not needed to question itself so far because its acquisitions were small. However, by taking on Asda, which is effectively the same size, the culture is unlikely to remain unscathed.

“When mergers succeed, it is because the target is small, the integration is straightforward, the acquisition close at hand and nothing is done to harm the culture of the acquiring firm”

This is where the governance needs to come in. The non-executive directors could have challenged the executives and put a stop to it, raising concerns about the size, the culture, Sainsbury’s own falling market share and said it was too much to handle. They could have worried about the systems and how two could be merged into one without any difficulty and asked if the workforce was really on side.

Of course, non-executives tend not to work this way. They are not inclined to make waves. The chairman, judging from his experiences with Argos when he was a cheerleader for the executives, might make it difficult for the others to break ranks. Most of all, putting the kibosh on the chief executive, Mike Coupe’s vision might have caused issues and he might even have resigned. Yet while that would be regrettable, it is arguably better than going on with a potentially damaging project.

Walmart, Asda’s parent, apparently wants out. It thinks Amazon is the competitor to fear and wants to husband resources in the US for the fight. Supermarkets have had their run of growth and are facing much tougher times. Having lost interest in Asda, Walmart wants to create a merger that will give it a reduced share of the combined entity, then when the time comes, sell out. What it will not do for long is have a minority holding it cannot control in a foreign country.

Mike Coupe talks about savings and how the customer will benefit, saying the combined business will be the largest in the land with over 30% of the market. He appears not to believe that customers are already fearful of Tesco’s dominance with its 28% share of the market, but only that they like the low prices. He says farmers and suppliers are taking the merger in their stride but is this really so? Surely if he is to deliver lower prices for consumers, then he has to get even lower prices from suppliers and they are already hurting. They cannot all be both having their cake and eating it.

But the politicians did not nail Mike Coupe on this point during his appearance at the select committee, which went as well as could be expected from his point of view.

One only hopes the Competition Commission will block it. No business should be given a market share of over 30%, no matter how hard they try to justify it. What will the non-executives do then? Like the Grand Old Duke of York, it appears that when they were up they were up, and when they were down they were down, yet they do not seem to have any influence in either direction.

Anthony Hilton is financial editor of the London Evening Standard

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