The CMA Investigation into the Asda-Sainsbury's Merger
- Alexander Mitchell
- Nov 5, 2024
- 4 min read
Updated: Feb 9
Background
In 2018, the Competition and Markets Authority (CMA) launched an investigation into the proposed merger of Asda and Sainsbury's, which would have combined to hold 32% of the market share, surpassing Tesco's 27%. The merger aimed to include all subsidiaries across multiple sectors, significantly reshaping the competitiveness of these industries (Competition and Markets Authority 2018; 2019).
The CMA noted the competitive nature of the industry, whilst being dominated by the 'Big Four' (Tesco, Sainsbury's, Asda, and Morrisons), the incumbent firms would struggle to raise prices beyond a significant level without losing customers to budget supermarkets such as Aldi and Lidl. However, they still decided to investigate this new proposed merged entity (Competition and Markets Authority 2019)
Details of Proposed Merger
As aforementioned, the proposed merger would include in-store, online, and wholesale grocery operations, petrol stations, convenience shops, and financial services including consumer credit and various insurance services. Key subsidiaries such as George, Habitat, and Argos attracted particular scrutiny, with specific regulatory concerns centred around Argos due to its ability to induce foreclosure mechanisms through refusal to supply competitors with Argos outlets of their own, whilst creating a 'halo' effect for stores of the new merged entity, as they would feature the outlet (Competition and Markets Authority 2019). Additional foreclosure mechanisms include predatory pricing, locking consumers into services through attractive discounts for regular purchases, input foreclosure (such as exercising control over supply or raising rival's costs).
Figure 1 displays how both supermarkets operate in similar areas, and as a result of this merger, would have allowed for the horizontal and vertical integration of various operations, potentially making the new entity dominant in several markets, raising concerns about the over-consolidated nature of the firm, coupled with reduced competition in various industries (Competition and Markets Authority 2019).
Market Share & Concentration
As part of the CMA's (2019) investigation, it collected crucial market share data to assess the landscape of the competitive supermarket industry, which formed the essential evidence base for the investigation. The data is key for understanding the potential impacts of the Asda-Sainsbury's merger. Table 1 features a summary of the key market share information.
Supermarket (a) | Market Share (b) | Squared Market share (c) |
Tesco | 27.6% | 761.8 |
Sainsbury’s | 15.9% | 252.8 |
Asda | 15.5% | 240.2 |
Morrisons | 10.5% | 110.3 |
Aldi | 7.3% | 53.3 |
Co-op | 6.0% | 29.2 |
Lidl | 5.4% | 36 |
Waitrose | 5.1% | 26 |
Iceland | 2.1% | 4.4 |
Ocado | 1.3% | 1.7 |
Other | 1.8% | 3.2 |
Independent | 1.8% | 3.2 |
HHI | | 1522 |
Table 1: Supermarket market share, based upon information from the Competition and Markets Authority (2019)
The C4 metric, which represents the market share of the four largest firms, is a common technique used to assess the impacts on markets and competitveness. Prior to the proposed merger, the C4 stood at 69.5%, signalling that the 'Big Four' already had a large market share. Post-merger, this figure was expected to rise to 76.8% due to the combination of Asda's and Sainsbury's shares, and then positioning Aldi as a new entrant to the 'Big Four'.
Moreover, the Herfindahl-Hirschman Index (HHI) is a more comprehensive measure of market concentration and is used to focus on market dynamics by giving more weight to larger firms (Table 1c). The pre-merger HHI was 1522, indicating an already moderately concentrated market. Post-merger, the HHI was projected to rise sharply to 2520.6, massively exceeding the competitive threshold of 1000, signalling the risk of anti-competitive behaviour. This substantial increase further underscores the CMA's (2019) concerns regarding monopolistic behaviour and a substantial lessening of competition (SLC) following the merger.
Why did the CMA intervene?
The CMA identified several critical concerns regarding the proposed merger between Asda and Sainsbury's, primarily due to the major impacts it would have on market dynamics (Competition and Markets Authority 2019). The merger was expected to substantially increase market power within sectors already dominated by so few large firms, raising the potential for oligopolistic or monopolistic behaviour, depending on the new firm's behaviour, which could stifle competition.
Concerns were also raised about the possibility of the merged entity becoming 'hostile' and dominating supply changes, heightening barriers to entry and expansion for competitors, leading to a decrease in market innovation and quality (Competition and Markets Authority 2019). Furthermore, there was a risk of price collusion, where the new firm may persuade and coordinate with other major players to artificially restrict output and raise prices, thereby seriously harming consumer welfare.
The CMA also held doubts of the market's ability to reasonably generate and support new competitors that could counterbalance this merger (Competition and Markets Authority 2019). As the merger was viewed as likely to create a SLC event, this prompted the CMA to intervene to protect the health of the market and maintain consumer welfare.
Conditions for Merger Approval
The CMA, despite reservations of the effectiveness of these measures, stipulated several conditions for the merger between Asda and Sainsbury's. Key conditions focused on the divestiture of paths of both businesses to mitigate market concentration concerns (Competition and Markets Authority 2019). Specific areas identified for divestiture included geographic overlaps to in settlements served by only the two merging supermarkets. The CMA also recommended divestitures in overlapping industries like banking and insurance. Additionally, they proposed selling off specific stores, such as supermarkets, convenience shops, and petrol stations, to maintain competitiveness in these sectors.
Outcome of Investigation
Ultimately, the CMA blocked the merger in April 2019, concluding that the proposed conditions were unfeasible and would undermine the purpose of the merger. While divestitures were suggested, they were deemed too extensive to maintain the new firm’s competitive viability. The CMA was particularly concerned about the merged entity’s market power and the potential impact on consumer welfare, competition, and innovation. This case sets a precedent for future large-scale retail mergers, reinforcing the importance of maintaining competitive markets in the UK supermarket industry.
References
Competition and Markets Authority (2018) CMA launches Sainsbury’s / Asda merger investigation. Competition and Markets Authority. Available: https://www.gov.uk/government/news/cma-launches-sainsburys-asda-merger-investigation[Accessed: 29 October 2024]
Competition and Markets Authority (2019) Anticipated merger between J Sainsbury PLC and Asda Group Ltd: Final report. Competition and Markets Authority. Available:https://assets.publishing.service.gov.uk/media/5cc1ec1340f0b64031cfa6f0/Final_reportSA.pdf [Accessed 3 November 2024]
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