May 10, 2018

The Sainsbury-Asda merger musical

Mike Coupe, CEO Sainsbury's (photo: Sainsbury's)
He's in the money: Sing along with Mike Coupe
You don't have to look very far to be amused in retailing. The proposed mega-merger with Asda in the UK has thrust self-effacing Sainsbury's CEO Mike Coupe temporarily into the limelight. In an unguarded moment, while waiting for an interview with British broadcaster ITV, he was caught singing "We're in the money. The sky is sunny. Let's lend it, spend it, send it rolling along" from the musical 42nd Street.

We shall never know whether Coupe's slightly off-key rendering of this catchy little tune was inspired by the thought of future bonuses in relation to the deal. Our enquiry to Sainsbury's press office regarding the same was neither acknowledged nor answered.

Sainsbury's and Asda are not the only quiet ones, however. The British Retail Consortium, the Food & Drink Federation, and the Competition and Markets Authority (CMA) only wished to make the briefest of statements. So we asked INSEAD Marketing Professor Marcel Corstjens for his expert view on what could be the largest event in the history of UK retailing.

"Two drunks in a car don't make a capable driver"

INSEAD-Professor Marcel Corstjens (photo: Mark Mackenzie)
(photo: Mark Mackenzie)
Marcel Corstjens
Professor Corstjens, the planned mega-merger of Sainsbury's and Asda surprised a lot of people, did you see it coming?
It is always tempting to say ex post facto that one had expected any major event, but, quite honestly, I had not seen this coming. The issues that were being talked about in UK grocery retailing had more to do with what Amazon's next move would be, how local grocers were going to deal with hard discounters, or the enigmatic future of Ocado.

The trade were also following Tesco's announcement that it is considering opening a hard-discount format. Other questions concerned the CEO succession at Tesco, given the speculation that current incumbent Dave Lewis might be in the frame to succeed Paul Polman at Unilever and that, following the purchase of Booker, Tesco had with Charles Wilson the perfect new CEO in place.

But a possible merger of Sainsbury's and Asda was not on the radar screen, or at least not on mine.

To what extent was the proposed deal influenced by the uncertainty around Brexit?
Not at all. As regards Brexit, England is and will always remain an island. Brexit just formalizes this fact one more time.

Are boardroom bonuses the real rationale behind this deal?
I would like to think not, although Sainsbury's CEO Mike Coupe was caught in an unfavourable position singing "We're in the money". Usually, although there will be some welcome windfall gains for senior management, the big winners in these types of operation often seem to be the bankers and lawyers.

Is the deal an admission of failure by Asda's US parent company Walmart, or just a realistic and elegant way for them to concentrate on North America, India, China, and online?

Asda in-store scene emphasing price (photo: Asda)
Grim Big Box store: After years of underinvestment from its US parent company Walmart, Asda has lost its traditional low-price image to German discounters Aldi and Lidl (photo: Asda)
A bit of both, I believe. A few years ago, Professor Rajiv Lal of Harvard Business School and I published an article in The Harvard Business Review where we showed empirically that the degree of internationalization of publicly-quoted grocery retailers was not a significant contributor to their financial performance.

Over the last years, we have seen most grocers reduce their international exposure. This would seem sensible. Focussing on a few markets where you can win is clearly the new motto, rather than planting flags in as many countries as possible. In this context, I was expecting a swap between Carrefour and Walmart, whereby they would exchange their respective businesses in Brazil and China.

On the other hand, the transaction shows that, after Germany, Japan, South Korea and Russia, where they hardly got off the ground, Walmart has now also thrown in the towel in the UK. They do seem to be slow learners, but they learn eventually and are not afraid to admit this at some point, even if rather late.

Most national cartel authorities have proved themselves to be paper tigers. The Competition and Markets Authority (CMA) recently waived through the Tesco-Booker deal despite criticism that the UK has become a 'Tescopoly'. But this was a smaller retailer-wholesaler merger...
An Aldi UK store (photo: Aldi UK)
How will the CMA count Aldi? (photo: Aldi UK)
Bruno Monteigne, senior analyst at Bernstein, believes that the CMA decision will be crucial. Much will depend on how the CMA defines the relevant set of competitors in the grocery retail market: Will Aldi and Lidl UK be in that set or not? Will the shopper consider Aldi and Lidl as viable destinations for their usual grocery shopping trip?

If the merged retailer has to close too many stores, it will be a severe hurdle for making the merger a success. The worst case scenario would be a long period of analysis and discussions before a decision is reached involving a large number of obligatory store closures.

But can the CMA really allow the creation of a duopoly where LZ Retailytics computes that Sainsbury's-Asda and Tesco could dominate at least 44 per cent of the local grocery retail market?
The 44-per-cent market share is not such a big issue. In many markets, for example in Scandinavia, the combined share of the two leading retailers is much higher. The more relevant issue is: Does the typical shopper have at least three options (different banners) available with a ten-minute drive? If the answer is yes, then that should guarantee price competition.

What will be the most probable outcome: A green light, minus around 75 Asda stores, after a lengthy authorization process of up to 18 months?

Friendly race (caricature: Oliver Sebel)
Just a little race among friends (caricature: Oliver Sebel)
I am not Madame Soleil, but I would be surprised if the CMA turned the merger down, or if they would make it prohibitively unattractive for the parties to proceed. There are too many grocers in the UK – they are destroying value and this is not sustainable.

Sainsbury's taking over Asda seems like an elegant solution for the UK authorities without jeopardizing shopper choice or increasing retailer monopoly power. A bigger Sainsbury's will get better deals from their suppliers, and what I call the Robin Hood-dynamic will ensure that most of the price benefits will be passed on to the shopper.

Statistics would indicate that every second retail merger fails. If this one is agreed by the CMA, will it be an Ahold-Delhaize-, a Carrefour-Promodès- or a Morrisons-Safeway-type affair?
I like the fact that they intend to run the combined operation under separate banners, thereby taking advantage of their key competences. Sainsbury's seems to be good at private label, and their acquisition of electronics retailer Argos has also given them added e-commerce and non-food know-how; while Asda seems to be better at non-food.

Obviously a merger will give both partners increased buying power with their suppliers. I am not convinced, however, that the two corporate cultures are particularly complementary, which can be an important issue (cf. Carrefour-Promodès). Also I don't know how many stores they will need to close or how long the transition phase will take (cf. Morrisons-Safeway).

Mike Coupe, Walmart COO Judith McKenna, Asda CEO Roger Burnley (photo: Sainsbury's)
Happy together: Mike Coupe, Walmart COO Judith McKenna, Asda CEO Roger Burnley (photo: Sainsbury's)
It has been argued that integration would be smoothed because Asda's current CEO, Roger Burnley, used to work at Sainsbury's, and Sainsbury's boss, Mike Coupe, once worked for Asda. This is flawed reasoning and seems to indicate a total lack of understanding as to what corporate culture really means. The Leeds-based Every-Day-Low-Price culture driven by Walmart at Asda is a very different animal to Southern-English, quality-driven Sainsbury's.

Whatever the CMA eventually decides, how significant is the risk that a disproportionately large amount of management time will be squandered on the integration process?
It is a serious risk, especially at this current point in time when there are massive competitive issues to be dealt with: hard discounters and e-commerce. Just because these two retailers face similar problems doesn't mean that putting them together will solve the problem. You can put two drunks in a car, but it still doesn't mean that you have a capable driver.

If the deal is waived through, will it hurt or benefit Aldi and Lidl UK, and how should they react?

If Aldi and Lidl continue to move more towards becoming a supermarket rather than staying a hard discounter, then they might meet some more headwinds. But, if they focus on what they are good at, i.e., small assortment, quality private label and great value, they will be just fine. Even if their current growth in like-for-like sales is slowing down, there are still a large number of white spaces in the UK for them to thrive for years to come.

To what extent will future competition between the Big Four and the discounters be fought within the private label arena?

Sainsbury's own label (photo: Sainsbury's)
Quality at a price: Sainsbury's own label must also compete with Aldi and Lidl UK (photo: Sainsbury's)
The issue of hard discounters for Tesco, Sainsbury's, Asda, and Morrisons is fundamental. The Big Four grocers have implicitly agreed for several years to park price competition between them on manufacturer brands via price-matching strategies.

This works in favour of the largest player, i.e., Tesco, who should have lower costs through economies of scale. The three others have little choice but to match. This is not sustainable as they have higher costs, and the Sainsbury's-Asda merger is one of the consequences.

UK retailers see private label as their differentiator, and they have some pricing power on private label. Sainsbury's private label, for example, is far more expensive. This results in a huge gap between Big Four private label prices and those of Aldi and Lidl, who have comparable, if not better-quality, private label.

The 20-per-cent or more difference between Big Four private label prices and those of Aldi and Lidl UK is due to two main factors: the size of the assortment, which is the key driver of operating costs, and the need for local retailers to develop their profitability via private label pricing.

Will Tesco be able to take on Aldi and Lidl with its own hard discount format?

Professor Marcel Corstjens, INSEAD (photo: Mark Mackenzie)
(photo: Mark Mackenzie)
Profound thinker on retailing: Marcel Corstjens holding his trade bestseller "Penetration."
Many supermarket operators have tried in the past and most have failed. Mono-format retailers seem to outperform multi-format retailers. There is always the temptation in a multi-format operation to capture some synergies between the formats, resulting in reduced differentiation.

In the real world, independence between formats is difficult to obtain in a multi-format retail business. In so many industries, existing players have tried to enter the low-price segment, but have often failed.

One could argue that the Portuguese retailer Jerónimo Martins (JM) has various formats, including supermarkets and discounters, and that they are all successful. However, JM has only one format in each country, so operations are separate.

Amazon inherited four physical stores in the UK via its purchase of Whole Foods last year. Is it more likely now that the Americans will extend their cooperation with Morrisons?
Maybe Morrisons are preparing their cooperation at a deeper level with Amazon. The Americans will need retail outlets in the UK as dark stores, which are closer to the consumer for home delivery, and to provide an exciting offer of fresh products and novelties.

I thought Sainsbury's might be a viable partner for Amazon because it has many stores in key UK markets, good private label know-how, the Argos asset, and quality positioning in the national market. But the Sainsbury's-Asda merger seems to be closing this door.

Lebensmittel Zeitung with digital sister (photo: LZ)
photo: LZ
Our German retail B2B newspaper, Lebensmittel Zeitung, in print & digital
Read in German: 'Morrisons könnte noch mit Amazon' & 'Sainsbury's- und Asda-Fusion gerät in die Kritik' by international editor Mike Dawson on page 10 of Lebensmittel Zeitung, no. 19, 11.05.2018

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  1. Tim
    Created 10 May, 2018 18:05 | Permanent link

    Culture clash and the financialisation of the Anglo-Saxon economies -- an example?

    When Morrisons captured Safeway's there was a little indigestion between corporate cultures -- the great north-south divide. Northern products started to appear on southern shelves -- gawd mushy peas?

    Sainsbury's southern capture of northern Asda does make you wonder if the southern English culture can capture the heart of the Asda consumer. There is a bigger culture clash between these businesses than the Morrisons/Safeway’s tie-up. The Freudian slip of Coupe singing "We're in the money" is truly symptomatic of the "aristocratic" southerners preoccupied with finance and "turning a coin".

    Dare I say it, but it mimics the crisis that is Brexit and the buffoonery of our parliamentarians?

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