On 25 April 2019 the UK Competition and Markets Authority ("CMA") published its final decision regarding the anticipated merger between Sainsbury's and Asda, the second and third largest grocery retailers in the UK. The CMA identified extensive competition concerns, including in relation to (a) the retail supply of groceries at both a national and local level; (b) the retail supply of groceries ordered online on a national and local basis; and (c) the retail supply of fuel on a local basis. The CMA was unable to identify suitable remedies that addressed the full range of competition concerns identified, and therefore was left with no option but to prohibit the merger in its entirety.
| what you need to know - key takeaways |
- This case is a reminder that the CMA will prohibit mergers outright where it has significant competition concerns that cannot be adequately addressed through remedies.
- Contrary to the views of the parties, the CMA's economic approach did not represent a fundamental departure from its approach to assessing previous grocery retail mergers.
- It is very difficult to convince the CMA that a merger will give rise to substantial efficiencies, with the Parties' claims that the merger would result in lower prices being rejected.
- Arguments that the market has fundamentally changed since previous CMA analysis need to be supported by the facts.
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Sainsbury's and Asda (the Parties) are the second and third largest grocery retailers in the UK, accounting for around 29% of in-store and online grocery sales. In April 2018, the Parties announced plans to merge, with Sainsbury's acquiring Asda from Walmart and, in return, Walmart would receive shares in Sainsbury's. The CMA started its Phase 1 merger inquiry into the merger in August 2018 (following four months of pre-notification) and referred the case to a detailed Phase 2 investigation in September 2018 following a "fast-track" reference request from the Parties. Details, including the Final Report, are available on the CMA's case page.
The CMA assessed the likely effects of the merger in five areas:
- in-store groceries;
- online delivered groceries;
- general merchandise;
- fuel; and
- buyer power in relation to suppliers.
In relation to general merchandise and buyer power, the CMA concluded that the merger was unlikely to result in a significant lessening of competition ("SLC"). However, in relation to in-store groceries, online groceries and fuel, the CMA's final decision identified SLCs in the following areas:
- the retail supply of groceries in both Sainsbury's and Asda supermarkets on a national basis, as the Parties were two of the largest supermarket competitors in the UK and their internal documents recognise the 'Big 4' (Tesco, Sainsbury's, Asda and Morrisons) as a distinct group;
- the retail supply of groceries in supermarkets on a local basis in 537 local areas, due to insufficient competitive constraints from other competitors in those areas. The CMA's analysis was based on a weighted share of shops model in which Aldi and Lidl received material weights that were nonetheless smaller than the weights for large Tesco, Sainsbury's, Asda and Morrisons stores;
- the retail supply of groceries in Asda convenience stores on a national basis, and the retail supply of groceries in convenience stores on a local basis in 18 local areas. Given that the convenience sector was not a core focus of the merger the CMA did not conduct an in-depth investigation into this segment of the market and instead adopted the methodology used in the recent Tesco/Booker Phase 2 investigation;
- the retail supply of online delivered groceries for Sainsbury’s and Asda on a national basis, as a result of a national reduction in competition between the Parties’ online offerings. In particular, only three online delivered groceries retailers (Tesco, Sainsbury's and Asda) have a near-national presence and many customers would have a restricted choice following the merger: sometimes limited to only the Parties and Tesco. The CMA only found that the merger would give rise to incentives to degrade elements of PQRS (price, quality, range and service) across Asda's online delivered groceries offer as Sainsbury's customers would also consider Ocado and Waitrose as alternatives;
- the retail supply of online delivered groceries for Asda customers on a local basis in 143 delivery areas served by both Parties. Notably the CMA did not identify any SLCs in local areas around Sainsbury's Supply Points as Sainsbury's was found to act as a competitive constraint on Asda in more local areas than the other way round; and
- the retail supply of fuel on a local basis in 127 of the local areas in which both Parties operate petrol filling stations. The CMA found that supermarket fuel retailers compete more closely with each other than with non-supermarket fuel retailers.
The Parties argued that there would be substantial cost savings as a result of the merger that would be passed onto consumers. The CMA investigated these claims and concluded that rivalry enhancing efficiencies would equate to around £500m per annum, but that this effect would not be sufficient to offset the negative impact on competition. The Parties also proposed a divestiture remedy package comprised of around 125-150 stores, potentially a number of convenience stores and a number of petrol filling stations. However, the Parties were unwilling to consider remedies on the scale required to address the CMA's extensive concerns set out in its Provisional Findings. In any case, the CMA considered it unlikely that a suitable package of assets could be found or a suitable purchaser could be identified that would effectively remedy the widespread SLCs. Accordingly the CMA prohibited the merger in its entirety.
There has been significant commentary as to whether the CMA adopted a new approach in its assessment of the retail supply of groceries on a local basis, with Mike Coupe (Sainsbury's CEO) claiming that the CMA had "fundamentally moved the goalposts, changed the shape of the ball and chosen a different playing field". This is not the case. The CMA's approach to assessing local grocery competition in Sainsbury's/Asda was to calculate a GUPPI (Gross Upward Pricing Pressure Index) for each store based on estimated diversion ratios between the Parties' stores and the Parties' margins. Stores with a GUPPI that exceeded 2.75% where identified as areas of concern.
This approach is not as radical a departure from previous decisions as some have suggested. Indeed, it is a very similar approach to the one adopted by the CMA in numerous previous grocery mergers (e.g. Asda Stores/Co-operative Group), whereby the CMA surveyed stores to determine a diversion ration and combined this with the parties' margins to calculate an IPR (Illustrative Price Rise – an alternative price pressure test). In past cases, an IPR above 5% was considered likely to give rise to competition concerns.
Whilst the CMA has adopted a lower threshold in this case for identifying competition concerns (2.75% rather than 5%) this reflects differences in the underlying calculations between the IPR and GUPPI tests. In practice, the different tests and thresholds result in similar levels of diversion ratio and gross margins being identified as raising concerns as was applied previously.
Ashurst acted for Morrisons in relation to the CMA's investigation.
