Sainsbury’s and Asda lower prices to achieve merger

Sainsbury’s and Asda, two British supermarket chains hoping for a merger, have promised to lower their prices and limit their margins if that makes their partnership possible. This is their response to the competition watchdog’s opposition to the deal.

Uncertain merger

The British competition watchdog is very concerned about the merger plans of Sainsbury’s and Asda – the number 2 and 3 supermarket chains in the UK. In the initial research report, the watchdog noted no fewer than 629 problematic locations where competition might be threatened. At least 300 stores would have to be sold to a single party to restore the balance. And even then, it would still be hard to solve all concerns, according to the report.

As the merger’s future consequently looks uncertain, Asda’s owner Walmart is now considering selling the chain to American investment firm KKR. The Americans are reportedly preparing to bid on the British retailer. Still, the two lovebirds have not quite given up their marriage plans: the economies of scale would be so advantageous and the merger company’s position would be so strong, that it still looks like the most interesting option to both parties.

A billion for lower prices

Sainsbury’s and Asda have therefore appealed against the conclusions of the competition authority and submitted their counter-arguments. They promise to lower their prices for everyday products by at least 10%. By the third year after the merger, both retailers solemnly swear they will invest a billion pounds in price reductions. In the first year, the merger company would already spend 300 million pounds on reduced prices and in the two years after that another 700 British pounds.

Both chains also run gas stations, and they promise to consciously limit their margins on fuel: Sainsbury’s says it will stick to a maximal gross profit margin of 3.5 cents per litre and Asda swears to maintain its current pricing strategy. Saving on expenses should make those investments possible: when it comes to their suppliers, the supermarket chains always assume they’ll be able to manage with the lowest price already being paid by either of the two parties. Sainsbury’s also wants to bring its non-food formula Argos into Asda’s buildings.

Nevertheless, the retailers haven’t failed to give the competition watchdog a piece of their mind: they claim the current report wields standards that have never been seen before and so creates an unreasonably large amount of problem zones. They also say the report’s conclusions don’t match the facts and the judgement contains significant errors. The authority is expected to release a final report on April 30th.