The retailers said that procurement efficiencies were the rationale behind the merger © Chris Ratcliffe/Bloomberg via Getty Images
The retailers said that procurement efficiencies were the rationale behind the merger © Chris Ratcliffe/Bloomberg via Getty Images

Sainsbury's Asda merger cost efficiencies claim rejected

20 February 2019

A markets watchdog has rejected claims procurement efficiencies generated by a merger between Sainsbury’s and Asda would allow customers to benefit from lower prices.

In a report examining the impact of the proposed merger, the Competitions and Markets Authority (CMA) said the downward pressure on pricing as a result of efficiencies would be only around 1%. 

When proposing the merger in April 2018, Sainsbury’s and Asda said that procurement efficiencies were the main rationale behind the merger, as both retailers currently pay large suppliers different amounts for identical products.

By converging on the same lower price, the retailers said they would be able to secure savings with suppliers that would in turn benefit customers. They would also be able to streamline processes and costs when producing own-brand foods.

At the time the retailers said: “We have no wish or incentive to harm our suppliers or to prevent the very innovation sought by our customers. We simply want to ensure that we are both charged the same fair price by suppliers.”

But in provisional findings the CMA said while the investigation had found the merger is likely to give rise to efficiencies which could lead to reduced prices, it has “not accepted” the evidence provided by the retailers regarding the scale of cost savings. It estimated that in the groceries and general merchandising markets, there would only be around 1% downwards pricing pressure.

Despite expectations that the merger would produce some measure of sustainable rivalry-enhancing efficiencies, across groceries and merchandise such as clothing, electricals and toys, there is unlikely to be any relevant cost-saving efficiencies in fuel markets, the report said.

In their proposal Sainsbury’s and Asda also said that a merger would allow the brands to work with suppliers more effectively, boosting efficiency while reducing supplier costs as well as strengthening relationships with small suppliers.

The CMA investigated how a potential increase in the buyer power of the retailers could distort competition in the supply of groceries, with adverse effects for customers.

Despite concerns that the merger could result in a lack of incentive to invest and innovate alongside suppliers, as well as forcing suppliers to raise prices for rival retailers, the investigation found that suppliers were not expecting to raise prices should the merger take place.

Outlining its concerns about the proposed merger, the report said it may result in customers experiencing a poorer shopping experience in-store and online across the UK through higher prices and reductions in the range and quality of products offered.

The CMA said: “We have provisionally found that, should the two merge, shoppers could face higher prices, reduced quality and choice, and a poorer overall shopping experience across the UK. We also have concerns that prices could rise at a large number of their petrol stations.”

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