Sainsbury's and Asda to merge, reacting to market competition

By Rod Addy contact

- Last updated on GMT

Asda owner Walmart would receive £2.98bn in cash from the deal
Asda owner Walmart would receive £2.98bn in cash from the deal
Sainsbury’s and Asda have confirmed plans to merge to form a mega-retailer that would, in theory, have a greater share of the grocery market than Tesco, in reaction to industry competition.

Asda’s owner Walmart first confirmed the move. In a statement, the US giant said: “Bringing together two distinctive customer propositions will create a more competitive, adaptable and resilient business – better placed to invest in price, quality, range and more flexible ways for customers to shop.”

Under the terms of the deal, Walmart would hold 42% of shares in the combined business, including 29.9% of ordinary shares in Sainsbury’s. Walmart would also receive £2.98bn in cash in a deal valuing Asda at £7.3bn.

The new force in UK grocery would become the number one grocery retail entity, passing Tesco, which holds a 28% market share.

Walmart stated: “The new business will operate a distinctive dual brand strategy. Asda would continue to be run from Leeds by its own chief executive officer, Roger Burnley, who would join the group operating board of the combined business, ensuring Asda retains its heritage and roots​.”

£51bn annualised sales

According to Walmart, the deal would create an entity with annualised retail sales of £51bn for 2017 and promised investment in price, quality and range, adding: “It is expected that value will be passed on to customers through significant price reductions.”

The new business would wield 2,800 Sainsbury’s, Asda and Argos stores. No store closures are planned as a result of the merger, but the initiative has inevitably raised queries for the Competition and Markets Authority, which must now scrutinise the deal. There is a reasonable possibility that the group will be forced to sell off some stores to satisfy competition requirements.

David Tyler, chairman of Sainsbury’s, said: “We believe that the combination of Sainsbury’s and Asda will create substantial value for our shareholders and will be excellent news for our customers and our colleagues. As one of the largest employers in the country, the combined business will become an even greater contributor to the British economy.

“The proposal will bring together two of the most experienced and talented management teams in retail at a time when the industry is undergoing rapid change. We welcome Walmart as a significant shareholder and look forward to working closely with them.”

Mike Coupe

Mike Coupe, chief executive officer of Sainsbury’s, said: “This is a transformational opportunity to create a new force in UK retail, which will be more competitive and give customers more of what they want now and in the future.

“It will create a business that is more dynamic, more adaptable, more resilient and an even bigger contributor to the UK economy. Having worked at Asda before Sainsbury’s, I understand the culture and the businesses well and believe they are the best possible fit.

“This creates a great deal for customers, colleagues, suppliers and shareholders and I am excited about the opportunities ahead and what we can achieve together.”

‘Even lower prices’

Asda’s Burnley said: “The combination of Asda and Sainsbury’s into a single retailing group will be great news for Asda customers, allowing us to deliver even lower prices in-store and even greater choice.

“Asda will continue to be Asda, but by coming together with Sainsbury’s, supported by Walmart, we can further accelerate our existing strategy and make our offer even more compelling and competitive.

“From my six years with Asda and 10 years with Sainsbury’s, I know first-hand that both organisations are fortunate to employ some of the most talented and customer-focused colleagues in this market and I am excited by the opportunity of the two coming together.”

Sainsbury results

Sainsbury announced a return to growth in its annual results this morning (30 April), posting underlying pre-tax profit of £589m in the 52 weeks to 10 March, up 1.4%, on group sales of £31.7bn, up 9% year-on-year. The retailer claimed 1.3% growth in like-for-like sales.

In food, the business said it was committed to offering competitive prices and recently invested a further £150m to lower the price of 930 essential items. It confirmed it had continued to invest in the quality of its food, re-launching 128 food ranges this year, covering 60% of food sales.

Amid the retail highlights, it singled out the performance of its Slow Cook range, which offers customers restaurant quality food. “Our share of this growing market has increased from 4% to 17% and we are now the market leader.”

Related topics: Business News, Retailing Crisis

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