Sainsbury's / Asda - Not looking good (20 February 2019)
20 February 2019
We have had somewhat of a slow start to the year on this service with varying bits and pieces of news coming through, but the peak period has passed and we can resume our usual 2 or so emails per week looking at the sector at large and the various events within.
The Asda / Sainsbury's deal now looks effectively dead in the water, unless a legal challenge can be mounted which surely just prolongs the inevitable given the CMA's decision which is robust in a sense of 1) prohibition and then 2) the remedies are incredibly difficult to actually achieve and are also near impossible to achieve in the timeframe.
We knew little beyond the bid documents which made sense for the dealmakers for the Asda / Sainsbury's deal, however if you go back in time to Morrisons / Safeway, Sir Ken indicated they'd keep the Safeway format and brand name for inner city stores or ones that were too small for the full Morrisons offer.
Morrisons took over Safeway and found a business that was literally on its knees financially, jacking up margins via hi/lo deals and hadn't invested in the store estate, or equipment for quite some time. I fondly remember a tale where the BDM (dough moulding kit in Bakeries) was so old, parts were no longer available for it.
Thus Morrisons had to spend a small fortune bringing the food preparation areas up to scratch before they started to back invest in adding labour and the various counters / back areas. Thus profit warnings ensued and the decision was made to flog some of the smaller stores that were sited in great areas of London and the South.
However I digress, Asda / Sainsbury's isn't like that as it's a "merger" - although Ken did turn up to Safeway HQ and remind everyone that it was 'a takeover, not a merger' on the day of acquisition... Hard to see that happening this time around, but the respective businesses are experiencing differing fortunes - Asda appear to have turned the corner and are currently performing very nicely in the market itself.
Their 7th consecutive quarter of growth means that for them, they are in recovery mode and continue to push on with a sharper offer and focusing on stronger events, driving footfall in George / clothing and also the wider non food ranges too.
Availability seems a great deal better under Roger Burnley than it had been in previous years and their consistency is better across the stores. Price and offer wise, they have become more competitive and continue to be ever so strong in areas like clothing, toys and non food.
One could always understand Walmart looking to exit the UK, or at least reduce exposure given the fact the market is 'built up' and returns are difficult, especially with discount. However, the merger gave Walmart a chance to remain as a key stakeholder for the enlarged firm and still benefit (presumably) from the expertise on offer in the UK.
The reality is that Walmart have options to exit Asda, however a full exit seems unlikely as they do benefit from the Asda business with UK based expertise and technology finding its way to Arkansas and beyond.
A spin off with Walmart retaining a shareholding looks possible, Asda CEO Roger Burnley has experience with a listed player (ironically Sainsbury's) and they're in good health which makes things a great deal easier for Judith McKenna, should she decide to pursue that strategy.
But for Sainsbury's; have they actually made themselves available for sale?
So we await next steps from Sainsbury's, and Asda. But Mike Coupe was quite strong in his response this morning - not expected to be anything else quite frankly....
However the scale of the divestments and the scope of which those divestments are covering - IE no choice in which stores are to go and indeed; a full fascia could possibly go too.
Alongside the taker of any business / store number would have to be credible and have experience in the sector so as not to reduce consumer choice.
This shows that the CMA is taking its responsibilities around the post merger activity very seriously too.
Whether we go down a legal route now, judicial reviews, tribunals and the like is unclear. Without a doubt though, like Brexit - this story could run and run and run.
But time isn't on their side, the market is competitive, Brexit planning and contingencies are taking a significant amount of time and effort in all retailers and suppliers.... How do you plan for something of which you have little idea of the impact(?)
Plus you still have to trade a core business amongst all that; we have charted on here for over a year that Sainsbury's were starting to falter in store standards and that has certainly become the case for the wider estate too.
Kantar doesn't make great reading either and you'd be hard pushed to say the bid wasn't a distraction for Sainsbury's given the stuttering performance. Even if it hasn't been. the mere presence of the bid details and work must factor - we're all human.
If somehow the deal gets through, somehow, that works for all parties... When will this be? How long can be afforded in limbo?
Then the hard work really begins anyway with the integration and what not, harmonising terms and IT, structures and the like.
However any talk like that seems very premature given the judgment today which whilst provisional, is unequivocal in it's finding....
Of most surprise in the judgment was the fact that the CMA wasn't overly concerned with Clothing, Kids Clothing, Toys and Electricals which were included in scope by the CMA post review and information gathering.
However the initial judgement means that this element is somewhat irrelevant in any case.
The question is what can Sainsbury's / Asda do to settle the CMA concerns to remedy the situation?
Can anything be done?
Where it was "we're in the money" via Mike Coupe on announcement day in April, is today a bit like another song from a famous musical?
"I dreamed a dream"...
From the Grocery Insight newsletter archive, first sent to subscribers on 20 February 2019. Steve now writes at read.groceryinsight.com. See also the blog archive and briefings.