Shares in Sainsbury (SBRY) hit a new 12-month low, down 5% to 215p, after the Competition and Markets Authority (CMA) blocks its proposed merger with supermarket rival Asda.

The CMA warned in February that its preliminary investigation had found ‘extensive competition concerns’ over the £7.3bn merger, sending Sainbury shares plummeting.

Today’s ruling concludes that ‘the deal would result in a substantial lessening of competition at both a national and local level’ and that shoppers ‘right across the UK’ would be affected, not just in areas where the two chains overlapped.

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While not entirely unexpected, this is a huge blow to both groups and their ambition to overtake Tesco (TSCO), the UK supermarket leader following its takeover of Booker in March last year.

According to research firm Kantar Worldpanel, Sainsbury and Asda had a combined 30.7% share of the UK grocery market at the end of March compared with Tesco’s 27.4% share.

In response to the news, Sainsbury chief executive Mike Coupe complained: ‘The specific reason for wanting to merge was to lower prices for customers. The CMA’s conclusion that we would increase prices post-merger ignores the dynamic and highly competitive nature of the UK grocery market. The CMA is today effectively taking £1bn out of customers’ pockets.’

LOSING ITS APPEAL

For Asda’s owner Walmart the deal offered a neat way to exit the UK market, one of the most competitive in Europe thanks to the success of German hard discounters Aldi and Lidl which had a combined share of 17.2% last month according to Kantar.

For Sainsbury there are major questions over its strategy now that it can no longer lean on Asda to bolster its market position.

It has been steadily losing share over the last year and despite the draw of its premium ‘Taste the Difference’ line it lost second place in the rankings to Asda just last month.

As Russ Mould, Investment Director at AJ Bell, points out: ‘Sales have been weak and the customer experience in its stores has been getting worse. Management may argue they were distracted by the deal talks but that would be a poor excuse. They have taken their eye off the ball and lost focus on how the day-to-day business is run.’

Chief executive Coupe insists that management are confident in their strategy and remain focused on their customers but analysts suggest that poor service standards are driving customers elsewhere.

‘Sainsbury's management may state that things have never been better operationally but the reality is different and has been so for some considerable time’ says Shore Capital retail guru Clive Black.

‘Indeed, we find it amazing how sticky Sainsbury shoppers are in the face of patchy availability, questionable store standards, uncompetitive check-out experiences and drifting relative pricing; drifting higher that is.’

COUP DE GRACE

The failure of the merger has inevitably stoked commentary surrounding the future of Sainsbury’s chief executive.

When the deal was first announced, Coupe hit the headlines after he was caught on camera singing ‘We’re in the money’.

While the mood music has changed, Shore’s Black views calls for a change of leadership as counter-productive given the poor trading performance of the core supermarket business: ‘It would hardly be helpful to our minds to change the leader at this juncture’.

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Issue Date: 25 Apr 2019