Sainsbury’s and Asda are planning to operate a “dual-brand strategy” as they reveal details of the merger that will create the UK’s biggest supermarket group.
In an announcement this morning (30 April), Sainsbury’s said bringing together the two businesses, which between them had revenues of £51bn in 2017, will result in a more “competitive and resilient” business that will be better able to invest in price, quality, range and the technology to create more flexible ways for customers to shop.
The shock deal between the UK’s second and third largest supermarkets creates a combined network of more than 2,800 Sainsbury’s, Asda and Argos stores. This equates to around a 31% share of the supermarket sector, ahead of current market leader Tesco on 28%, according to Kantar Worldpanel figures.
Both the Sainsbury’s and Asda brands will be maintained and will operate as a “dual-brand strategy” in grocery in an effort to “sharpen their distinctive customer propositions and attract new customers”. Sainsbury’s says it also aims to lower prices by around 10% on everyday essentials.
“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,” says Sainsbury’s chief executive officer, Mike Coupe.
“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.”
Grocery is not the only area where the businesses overlap. Asda has the George clothing and homesware business, while Sainsbury’s has Tu, Argos and Habitat. The merger causes an interesting brand architecture challenge, with the deal significantly increasing the number of brands in the Sainsbury’s Group and leading to questions over how they retain their distinctiveness.
We're creating a dynamic new player in UK retail – three well-known, trusted brands in Sainsbury's, Asda & Argos. We plan to operate a dual-brand strategy in grocery, with the scale to invest in the areas that matter most to customers: price, quality & more flexible ways to shop pic.twitter.com/YwPeJ67vxu
— Sainsbury's News (@SainsburysNews) April 30, 2018
The deal values Asda at £7.2bn. Under the terms, Walmart will retain a 42% stake in the newly-combined business. Sainsbury’s has said it expects to create synergies of more than £500m and has no plans to close stores, although it is widely expected the Competition and Markets Authority will force the group to dispose of some stores in areas where both brands have a large footprint.
Judith McKenna, president and chief executive officer of Walmart International, says: “This proposed merger represents a unique and bold opportunity, consistent with our strategy of looking for new ways to drive international growth.
“We believe this combination will create a dynamic new retail player better positioned for even more success in a fast-changing and competitive UK market. It will unlock value for both customers and shareholders, but, at the same time, it’s the colleagues at Asda who make the difference, and this merger will provide them with broader opportunities within the retail group.”
The combined business will be chaired by Sainsbury’s chairman David Tyler and led by CEO Mike Coupe and CFO Kevin O’Byrne. Asda will continue to be run from Leeds with its own CEO Roger Burnley.
Both grocers have been suffering in the wake of the disruption in the sector over recent years. In the face of the increasing popularity of German discounters Aldi and Lidl and a resurgent Tesco and Morrisons both have seen sales slip. Despite a rally in the run-up to Christmas, Asda reported a drop in sales to £21.6bn in its last financial year, from £22.3bn a year earlier.
Sainsbury’s total grocery sales were up 2.3% in the 15 weeks to the 6 January. It no longer breaks out revenues and profits for its grocery business separately but Kantar Worldpanel latest figures show its market share dropped to 15.8% in the 12 weeks to 25 March, from 16.1% a year earlier. Asda’s shared fell from 15.8% to 15.6% over the same period.
Sainsbury’s has been in acquisition mode in recent years, buying Argos for £1.4bn in 2016 and loyalty scheme Nectar for £60m earlier this year. But it is not the only one looking to acquistions to bolster its position in the retail market. Tesco bought Booker last year in a deal that is widely thought to have led to the discussions between Sainsbury’s and Walmart.