W ould competition regulators really smile upon a combination of Sainsbury’s and Morrisons? One must assume the two companies believed the Competition and Markets Authority (CMA) would give a thumbs up if asked, otherwise they would not have initiated their now-aborted merger talks.
It’s easy to list the arguments the duo could make. First, the combined market share of Sainsbury’s (15.2%, on the latest numbers from Worldpanel analysts) and Morrisons (8.4%) would still be less than that of mighty Tesco (27.8%). It would not be a case of leap-frogging the market leader, which was Sainsbury’s big idea back in 2018 when Asda was in its sights.
Second, Aldi and Lidl are a stronger force in the land. Together, the German discounters represent almost a fifth of the UK market and, since they’re backed by serious international buying muscle, their role as the country’s grocery price police might not be affected one jot.
Third, since Morrisons has already sold its petrol stations, the CMA needn’t worry about the touchy issue of fuel. Fourth, at a push, Sainsbury’s and Morrisons could argue that the UK’s food security (a growing political worry) would improve if the latter’s 18 food-processing factories were housed within a stronger company that could boost local production.
So, yes, one would probably bet that the CMA would ultimately approve some version of a deal. But what version? How many store disposals would be demanded?
The CMA, as in 2018, would presumably conduct a site-by-site analysis of drive-times to judge local competition. The regulatory instinct, one suspects, would be to err on the side of intervention in light of the overall national picture. Never mind Tesco’s size, it would still not be a simple decision for a competition regulator to sanction a supermarket setup in which half the trade, or thereabouts, would be in the hands of just two companies.
Would a deal still make sense after the CMA’s remedies? It’s impossible for Sainsbury’s and Morrisons to know until they go through the process. That’s the distraction factor for Sainsbury’s. Does its chief executive, Simon Roberts, really want to spend a year bogged down in regulatory back-and-forth? In the Asda episode, the effort sucked the life out of his predecessor’s reign.
It’s not as if Sainsbury’s is struggling today. The group is winning market share, profit margins are stable, there’s enough spare cash for share buy-backs and the strategic headaches of its bank and Argos have been solved by selling both. While it would be preferable to square up to Tesco’s buyers on more equal terms, life ain’t bad.
Round at private equity-owned Morrisons, the calculation will be different. Five years after buying the chain for £7bn, owners Clayton, Dubilier & Rice’s thoughts will be turning to how to exit a tricky investment. A disposal will surely look easier than a stock market flotation and the list of potential suitors is short: Sainsbury’s is indeed the obvious candidate.
All of which says Sainsbury’s can afford to do nothing, or wait for the terms of any deal to improve. It was the party that walked away from the talks, reported the FT. That’s not a surprise. If a relative bargain is possible, the hassle of a CMA process might be worthwhile. But this is not a must-do deal for Sainsbury’s.
