Published on: April 30, 2018Walmart this morning said that it plans to sell its UK-based Asda Group to British retailer J. Sainsbury, pending antitrust approvals by regulators.
Walmart will get $4.1 billion in cash, and will keep a 42 percent ownership stake in the combined company, which would be the UK’s largest grocer, with 2,800 stores.
Sainsbury says that its goal is to not close any stores in the merger, and to immediately lower prices by 10 percent on many “everyday” items.
The deal values Asda at $10 billion.
Most reporting suggests that Mike Coupe, CEO of Sainsbury, would run the merged operations. Note: Mike Coupe is not related to “Content Guy” Kevin Coupe, who only wishes that he could pick up the phone, call cousin Mike, and get the straight scoop. Roger Burnley, Asda’s CEO, is, as Bloomberg points out, a Sainsbury veteran.
Over the past few years, the UK”s four big grocers - Tesco, Sainsbury, Asda and William Morrison - have all suffered declines in their market shares, in part eaten away by discounters Lidl and Aldi. They also have had to contend with the online threat from Amazon.
The Financial Times writes: “It’s not hard to see why Sainsbury’s and Asda want to fuse their businesses. Both are wrestling with the same plethora of problems, which go far beyond the depredations that have allowed the German discounters to move from 5 to 15 per cent of the market in a decade.”
Walmart acquired Asda in 1999 for about $10.8 billion, and at the time was engaged in a strategy of global expansion. In recent years, however, as the Times writes, “Walmart has pulled back from that international growth after struggling to crack markets like Germany.”
The Wall Street Journal this morning writes that “for Walmart the move is part of a broader shift to form joint ventures in competitive markets and focus investments in areas executives think will provide growth.
In fact, Reuters reported over the weekend that “Advent International Corp is in exclusive talks to acquire an 80 percent stake in Walmart Inc’s Brazilian unit,” which has been shopped around by Walmart since early this year.
Bloomberg writes that this reflects Walmart’s new global strategy, “to emphasize faster-growing markets over some of its more mature ones … Walmart is pursuing faster-growth markets overseas, including China and India, while battling e-commerce giant Amazon.com Inc. in its core domestic market. It’s close to completing a deal for a majority stake in India’s biggest online retailer, Flipkart Online Services Pvt, Bloomberg reported last week.”
The New York Times goes on to write that “putting Asda together with Sainsbury, one of Britain’s biggest grocery chains, could help the combined business negotiate lower prices from suppliers, one of the primary goals of many retail mergers … The biggest hurdle to a merger could be Britain’s competition regulator, which may be wary of allowing two of the country’s biggest grocery chains to combine.
“The companies may argue that they serve different consumers: Asda caters more to cost-conscious customers, while Sainsbury aims for wealthier ones. Their stores are also largely located in different parts of Britain, with Asda more prevalent in the north and Sainsbury in the south.”
The Financial Times writes that while Walmart has responded to Asda’s competitive troubles by skimping on investment, “running the group for cash and not following the herd in pursuing costly innovation. The consequences are becoming apparent in its figures: last year, while sales fell 3 per cent, operating profits dropped almost a third.” Sainsbury, however, “has the know-how to improve Asda’s threadbare offering.”
The Journal says that “in recent years, Tesco, Sainsbury and rival Wm Morrison Supermarkets PLC poured money into their operations, but Walmart held back. It tapped a string of Asda’s most senior executives, including its operations chief, e-commerce head and two chief financial officers, and put them in positions in its U.S. business, weakening Asda’s talent pool, say analysts.”
FT seems to be skeptical in its analysis, writing that it remains to be seen “whether a deal of this sort can be justified as being in the public interest. The pair will point to the recent, and mystifying, decision of the Competition and Markets Authority not to impose any remedies on Tesco when it merged with the wholesaler Booker, despite the latter’s role as a big supplier to convenience stores. They will point to the rise of online supermarkets such as Ocado, and the ever-present threat from the giant Amazon.
“These pleas should be treated with caution. Market shares for the Big Four overall may have come down: from 76 per cent in 2009 to 70 per cent last year. That’s pretty much back to the share the four biggest chains had in 1998.
“But that should not obscure the regressive nature of the deal. In practice, it would mean swapping a Big Four for a Big Two, with Sainsbury/Asda and Tesco each controlling about 30 per cent of the market. Whatever the consequences for consumers, the outlook for suppliers would be bleak.”
- KC's View:
Both companies are saying something critical about their relative strength in an increasingly competitive marketplace - that they’d be better off together than separately.
This won’t matter to the plethora of people and entities that will come out of the woodwork to oppose the deal. It is hard for me at this point to judge how successful they will be, but not hard to guess that it will be a long, drawn out and bloody process.
One guarantee: Plenty of barristers will get rich.
It really doesn’t matter what the final shape of the deal is. What we know is that attacks on the established retailing infrastructure in the UK from two ends - Lidl and Aldi on one side, and Amazon on the other - has shaken the business to its core. It isn’t like Asda is a small, weak player … this is a company that is owned by the biggest retailer in the world, with seemingly endless resources.
But all these traditional players somehow misjudged the market, and managed to leave their shoppers vulnerable to pitches from outside entities that somehow managed to attract them, to get them to change their behavior … probably first in small ways, and then, finally, in big ways that mattered.
To me, the object lesson is that there is no place that this cannot happen, and no single company that is immune. Sure, the US is a much bigger market with a lot more players … but I’d also argue that this means that there are a lot of smaller players who are in worse shape than the likes of Asda and Tesco, with fewer resources and thinner benches, susceptible to attacks from all sorts of angles.
The retail landscape continues to reshape itself, and there is going to be all sorts of collateral damage.