LONDON — British supermarket giant Sainsbury’s is set to reveal details of a megamerger with Asda that would create a formidable retail force and solve a few headaches for Asda’s parent Walmart.
Sainsbury’s said it plans to update the markets Monday morning regarding its proposed tie-up with Asda. The deal, estimated to be 12 billion pounds, would be the biggest M&A strike the supermarket sector has witnessed in more than 10 years.
The news, which shocked the industry, was reported by Sky News on Saturday. Sainsbury’s later confirmed that it was in “advanced discussions” with Walmart Inc. regarding a combination of the Sainsbury’s and Asda businesses, but declined to give further details about the structure of the new behemoth. Asda declined to comment on the talks.
The tie-up would create a retailer with an estimated annual sales volume of 50 billion pounds, knocking Tesco out of its number-one supermarket slot. It would also create a retail force that could negotiate more effectively with non-U.K. suppliers ahead of Brexit and with a more volatile pound.
Although the news came as a surprise, many industry observers said it would make good sense given the fierce price competition among U.K. supermarkets, shrinking profit margins, sourcing pressures due to the weaker pound, and fast-changing consumer shopping habits.
“No one saw this coming,” said George Wallace, chief executive officer of the pan-European consultancy MHE Retail. “But it does make quite a lot of sense given the brutally competitive climate among U.K. grocers, the cost savings that could be made, the changes in consumer habits and the rise of competitors such as Aldi, Lidl and Amazon.”
U.K. customers are increasingly shopping online and in smaller-format, city-center stores rather than sprawling, out-of-town shopping malls where many of the bigger Sainsbury’s and Asda units are located.
Since the financial crisis of 2008, the big British supermarkets have come under increasing pressure from the likes of German discount chains such as Aldi and Lidl, which have invested huge sums in recent years to build smaller-format stores in suburban neighborhoods or near high streets.
Those German chains have upped their respective games, introducing better merchandising and more premium products such as lobster and shellfish, gourmet meats and cheeses, and an improved selection of wine.
Big U.K. supermarkets were also rattled by the arrival of the Amazon Fresh food delivery service, and Amazon’s takeover last year of Whole Foods. Although Amazon offers a premium, by-subscription food service, it has given the bigger chains and discounters pause for thought about potential future takeovers and expansion into the U.K. market.
Asda has been one of the biggest supermarket chains to suffer at the hands of Aldi and Lidl, both of which have undercut it on price. Walmart bought Asda in 1999 in a bid to plant its flag in the U.K. and dominate the local market with a string of out-of-town megastores offering discounts galore.
“Save money, live better” has long been Asda’s motto, but it has increasingly struggled to fulfill that promise to customers — and turn a profit. It has witnessed 11 consecutive quarters of falling sales, although it began to recover and show some growth late last year.
Wallace of MHE Retail said building up Asda had always been a struggle for Walmart. Today, nearly 20 years after it purchased Asda, Walmart has other, more pressing matters on its hands, foremost of which is competing with Amazon in the U.S.
Although it remains unclear how this new deal will be structured, whether the Asda name will remain, and what role Walmart might play in the new entity, Wallace said he feels “Walmart could be quite relieved to offload its problem child Asda. This deal would allow them to elegantly exit, stage left, and let Sainsbury’s go forward with the business.”
No one — at least for now — appears to be particularly concerned about the U.K. competition authorities, which surprisingly waved through Tesco’s 3.7 billion pound acquisition of the wholesaler Booker last year.
Industry observers have said Sainsbury’s and Asda were most likely emboldened by the Tesco coup, and were also eager to strike before an antibusiness Labour government takes over, which would likely mean no more deals and could mean the breakup of large corporations.
Wallace pointed out that, were the Sainsbury’s/Asda merger deal to go through, there would likely be no surprises once the dust had settled: The chief executive officer of Sainsbury’s is Mike Coupe, a former Asda executive, while the newly installed president and ceo of Asda is Roger Burnley, a former retail and operations director at Sainsbury’s.
“It means that if and when a deal is done, both stores will have a reasonable understanding of each other. Both executives know where the skeletons are, where the opportunities are, and it would give the merger quite a head start from Day One,” he said.