Shop just got real - Sainsbury's planned merger with Asda (Walmart) ups the online grocery stakes

Stuart Lauchlan Profile picture for user slauchlan May 2, 2018
Summary:
If Sainsbury's and Asda have their way, 2019 will see a new leader in the UK grocery sector, with Walmart tagging along for the ride.

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The shifting competitive landscape in the grocery industry is something we’ve tracked closely at diginomica, both in the U.S. and in Europe, where the online side of the business is more mature.

Looming over all the disruption is, inevitably, the long shadow of Amazon, with traditional grocery retailers putting in place their defensive plays in anticipation of the oncoming storm.

The latest such play has been confirmed this week in the UK with the country’s second-largest supermarket chain Sainsbury’s announcing it intends to pay £7.3 billion ($10.1 billion) to buy the third-largest, Asda, owned by U.S. retail behemoth Walmart.

If the deal goes through - and there are inevitably competition questions for the regulators here - the combined entity will overtake Tesco as the nation’s biggest supermarket, help Walmart’s international expansion ambitions (it will own 42% of the new firm) and see an acceleration of omni-channel capabilities, the anti-Amazon angle.

It’s a logical move, insists Sainsbury CEO Mike Coupe, adding that the rise of e-commerce and digital channels has cemented the rationale for the move:

The world that we live in is changing and changing very rapidly. Customers have more choice than ever, whether it’s the discounters, whether it’s convenience stores or whether it’s supermarkets, whether it’s online channels - and of course, the rise of digital technology has amplified that.

If anything, the speed of change is accelerating, not decelerating. And competitors that couldn’t have even existed 10 years ago are covetously looking at the markets we operate in, and we believe that it’s important for this transaction to take place to make our businesses fit for the future.

That means a lot more investment in digital tech, he explains:

If you look at grocery, both businesses have strong online grocery businesses and have an increase in in-store technology…increasingly, customers will be using those types of digital interactions to shop more flexibly with our types of businesses in the future.

Sainsbury’s has a very strong position in convenience stores, 800 convenience shops, the best quality of real estate in the industry, our track record of growth and market-leading sales densities. And we mustn’t forget the combined strength of the group as far as general merchandise and clothing is concerned.

Sainsbury’s also has its Argos acquisition folded into the corporate structure now, with all the e-commerce infrastructure and experience that this brings:

With Argos, we have a tech-led general merchandise business. That brings the third most visited website to the organization with 60% of sales online and now over 1,000 store points of presence. We also have a strong and fast-growing online clothing business in both businesses, so whether that’s George online or as the launch of two online with Argos. So again, not just strength in scale, but it’s also strength in the growing channels to market.

Omni-channel clout

From the Asda perspective, CEO Roger Burnley is keen to play up his firm’s existing omni-channel push:

We are multi-format. Our store size goes from 8,000 square feet to 160,000 square feet with the average pretty much bang on identical. We have a grocery online business, which is going gangbusters, grew in low – in high single digits last year. We have a George.com business, which is growing really well at over 30% year-on-year growth last year. And we have 33 Asda Living stand-alone general merchandise and clothing stores and 18 stand-alone petrol filling station. So we’re pretty omnichannel already and that’s certainly growing.

Asda has benefitted from being able to tap into its parent company’s tech and digital platform work, he adds, something which the planned combined firm would also benefit from:

We have Walmart support that we’ve touched on, which has been there for 20 years across technology and digital, across sourcing, especially general merchandise sourcing, and across people and development and talent. We’re further developing our digital and online capability, driving more growth and sophistication in our home shopping offers.

He cites the parcel towers that are already appearing in UK Asda stores, “a direct import from Walmart in the U.S. where you can collect your parcels in under 90 seconds”, as an example of how this transatlantic tech exchange works in practice:

That continues. We’ll have scan-and-go in 200 stores by the end of the year, which customers really tell us they love and keeps them in control of their shops. So lots more development online and digital capability paying dividends…So we’re moving the dial but still more work to do and more opportunity there…we have momentum. We’re doing all the right things, and our strategy continues to invest in all those things, but no danger. This combination really allows us to accelerate that strategy and do a really great job for our customers.

Three in this marriage

The third party in this proposed marriage is of course Walmart, whose Head of International Judith McKenna is keen to emphasise the digital clout that the U.S. firm will bring to the table as well as its enthusiasm for expedient alliances:

Walmart has, in the last few years, been transforming itself. You’ll have read, no doubt, about our leading into digital, online and omni-channel. But equally, we have been much more open to new partnerships and have particularly created two new partnerships. One is Rakuten in Japan, and the other one is JD.com in China, both of which have really helped us build capabilities in our business that we didn’t have previously.

When you think about those markets that we operate in and you think about a market like China, which is probably one of the most advanced ecosystems and e-commerce markets in the world, we operate there and we operate there effectively.

One of the things that you have to remember there is that 6 years ago, China was cash-on-delivery, if you took a delivery of an item that you ordered online. Today, it is, they say, the most sophisticated market in the world from a financial payments perspective and from an e-commerce perspective.

And from an online groceries perspective, the UK is streets ahead of the U.S. right now, a consideration that’s clearly been taken into account:

Effectively, if you think about it we’re opening the doors as Walmart and saying, what is that within our organization that you would like to pull from that would benefit the combined business? That could be anything from tech towers that we create to smart carts being used as part of the Jet.com platform to something that’s been developed in China in terms of picking capability.

Equally, the UK is one of the most advanced markets for grocery delivery and grocery picking in stores that there is. So there may be some of the synergies that flow the other way as well. The details of what it is and how it’s going to work exactly, we will still be working through.

But the overall objective is clear, she adds:

Omni-channel, seamless and convenient. Customers are expecting not just to save money these days, but to save time as well. So one of the partnership principles that we’ve got is how do we lean in more to an acceleration of omni-channel. When you look at these two businesses coming together, you think about the geographic fit for them and you think about the access that gives customers to the combined businesses.

All of this presumes that the deal gets regulatory approval to proceed to completion. Already some UK legislators have voiced concern, as have employee trades unions. So all eyes will be on the the UK’s Competition and Markets Authority (CMA) as it scrutinises the deal.

Coupe has a lot of experience in handling the regulator, following the Argos acquisition and the sell-off of 200 pharmacies. He takes a conciliatory tone for now:

In the end, the CMA are there to protect consumers, and they will look at this deal from that perspective. We think there’s a fantastic customer story in this. We’ve talked about that today. We think ultimately, this transaction will act to the customer good. I’ll finish if I can. And we think that ultimately, we get to – the CMA will get the right answer for customers.

My take

The news of the proposed merger was greeted with supposed surprise last weekend when it started to leak out, but in reality this is a deal that’s been a long time in the making.

If it comes to a successful conclusion - and the CMA nodded through Tesco’s controversial takeover of Booker, so let’s assume it does - then it will be a personal triumph for Coupe, who’s flirted with Walmart for several years, being employed by Asda in the 1990s prior to the U.S. chain’s takeover in 1999.

This is clearly a game-changing move in the UK retail sector and one that has transatlantic and international implications. It’s unlikely to cause too much ‘pause for thought’ over at Amazon, of course, but it would be interesting to be a fly on the wall in the boardrooms of Tesco, Morrisons et al right now.

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