Comparing the competition in the UK grocery, online shopping and petrol markets

In a decision which may prove to be a blow to the supermarket outfits’ plans, the Competition and Markets Authority (CMA) has provisionally found that the proposed merger between Sainsbury’s and Asda may result in a substantial lessening of competition in the UK grocery, online shopping and petrol markets.

As well as providing feedback on the proposed deal, the CMA’s summary of provisional findings offers an interesting consideration of exactly what a “market” is and the factors which can affect this.

National v local markets

The CMA considered two geographical markets.

National

Nationwide stores (including supermarkets) apply policies across all stores, including price, own brand goods and overall branding. They are also able to use their national status in relationships with suppliers, giving them a potential supply-cost advantage. The CMA found that:

• there were areas where there was significant overlap in the locations of both Asda and Sainsbury’s (45% of Sainsbury’s supermarkets and 57% of Asda’s). Customers in those areas would lose the obvious benefit of having two retailers to choose from; and
• due to the effect of the national policies, the merger had the potential to produce a significant lessening of competition even in areas where just one of the supermarkets was present.

Local

The CMA found that supermarket competition is driven predominantly by convenience, with customers more likely to shop at a local store than travel further afield. Supermarkets also adopt localised policies which can have wide ranging impact be it on the queueing times at the checkouts or on the deals that are offered in local stores. On this basis, the CMA concluded that the merger has the potential to reduce competition and consumer choice at a local level.

The CMA’s consideration of both local and national effect demonstrates that a market goes beyond a simple concept of “where an industry operates” and looks at both the policies applied by businesses and consumer habits.

Consideration of the discount retailers

Much has been made of the impact of discount retailers in all areas of the high street in recent years, with Aldi and Lidl proving to be two of the biggest disruptors in the grocery industry. In fact, the CMA’s provisional findings show that:

• combined, Aldi and Lidl make up 11% of the UK market – more than Morrison’s who are considered one of the “Big 4” supermarkets (alongside Tesco, Sainsbury’s and Asda); and
• although the discounters provided a competitive constraint on the Big 4, this was less significant than the competition provided by the Big 4, with both customers and the retailers themselves being aware of the differences between the two groups.

This finding had the effect of reducing the market considerations to the Big 4 in the first instance, making the significance of the merger, and therefore the potential impact on competition, greater.

The CMA’s approach to these two spheres of the market could have an impact in industries where there is a clear distinction between competitors, particularly in markets where there are “budget” and “luxury” providers. The effect of this could be to reduce the market size considerably.

Segmented markets

The CMA’s report also offers an interesting perspective on the importance of considering individual product lines and the potential competitive impact that may be felt in these areas.

For example, the report found that the merger had the potential to make the merged-offering the largest supplier (by value) of childrenswear in the UK. However, it provisionally found that this would not result in a significant lessening of competition in that market, on the basis that there was significant competition, both from other supermarkets, and large nationals such as Primark and Next. Therefore, although the merger had the potential to create dominance in this market, this would not inherently affect the consumers’ choice. The CMA reached a similar conclusion when it considered the supply of electrical products and toys.

The CMA’s consideration of the individual product areas reinforces the power of the CMA to provide recommendations for mergers where there may be an individual cross-over in product lines. This could have an impact for more specialised markets, where there are generally less competitors.

The end of the line?

Whilst the CMA’s provisional findings are not a final decision on whether the merger can proceed, the findings do raise substantial red flags which will need to be considered by both parties. As with all mergers, it is important to consider where the potential competition issues may arise and to take legal advice as soon as possible on ways to tackle these.