Not in the money
25 April 2019
So it was ever thus, the deal that kicked off around 12 months ago (30th April is "we're in the money day") with Mike Coupe singing his favourite song from the musical 42nd street and the deal taking the sector by surprise was finally put to rest today.
Indeed; the CMA typically have provisional regulations that are far tighter than the subsequent decision but this deal went the other way, with any remedies not possible - the CMA blocked the deal competition grounds.
This led to both parties abandoning the deal, a few million lighter than they were a year ago.
From a Walmart perspective, the deal was one that Judith McKenna inherited (having being kicked off by Dave Cheesewright). Equally Roger Burnley inherited this deal having barely been in the business when talks started and barely in the top job when things progressed....
Therefore Walmart, who would have held 42% of an enlarged company are able to retreat from the deal and continue with their relative progress, via Asda, in the UK market (which has proved ever so useful for them in recent times).
Walmart state that investment will be forthcoming to enable the business to continue to compete in the UK and they've done a decent job in the last year or so of maintaining share and Kantar has been positive for them.
Of course discounters loom large for everyone, but there are points of attack and the better store environments that Asda are focused upon (it always seemed odd that they were refitting and investing in stores as Sainsbury's appeared to do the opposite) will stand them in good stead.
For Sainsbury's - I really thought they needed the deal to happen given their leveraged position, indeed margin has improved (now nudging above 2%) but that's with Argos (non food margin good, electricals less so) and also a strong non food and clothing business.
However one surprising element of the deal was that the Asda business is 90% freehold and therefore is in control of the balance sheet, less costs on the rentals.
Whereas Sainsbury's who are nearer 60% freehold have a far higher liability around stores that are leased and this impacts the numbers too; more costs via rent, upwards rent reviews also hurt the numbers further.
Not a great place to be.....
This is without the wider issues in the chain; the company and the positioning in the market.
Stores are not in a good place, basic maintenance looks to be an issue with shelf stripping missing and yellow tape over chiiller units that have been hit with a pallet or similar.
Cost savings have delivered the numbers but they have also brought a materially worse shopping experience without question, therefore how do you frame that in a turnaround (of sorts?)
There is so much more to speak about in terms of Sainsbury's - we have done plenty already (there has been a consistent message on this service around JS for 2 years now) and there's more to come to boil down and focus upon.
As we can see above; half year at Sainsbury's saw £17m spent on the Asda transaction, what the final sum will be remains to be seen...
As the FT reported last night (correctly) there would be no appeal and things were not going to progress.
However they also highlighted an intriguing point about Sainsbury's setting out their ambitions for the future to grow sales, and profits at (what looks like) an eventful full year presentation next week (May 1st).
As one of the Twitter family said to me when I asked for musical song suggestions post the provisional CMA decision....
The suggestion of "I dreamed a dream" has never seemed more apt.
The Sainsbury's business is a great one and has so much history and heritage, their 150th year this year (what a way to mark it) yet it seems to be struggling in food - which is absolutely their bread and butter...
More to come on this, the weather, B&M and our remaining discount / variety stores round up to come in the next few days.
From the Grocery Insight newsletter archive, first sent to subscribers on 25 April 2019. Steve now writes at read.groceryinsight.com. See also the blog archive and briefings.