What's going on?
News broke on Sunday that two of the UK’s biggest supermarket chains – Sainsbury’s and Asda – have agreed to merge their businesses in a $20 billion deal that may transform the green and pleasant landscape of British grocery.
What does this mean?
Sainsbury’s (the UK’s second-largest grocer) is looking to merge its operations with Asda (the third-largest) in order to better compete against not just Tesco (the largest), but also discounters like Aldi and Lidl that have taken the UK (nay, the world?) by storm.
Asda, significantly, is owned by American giant Walmart. As Walmart has already retrenched from some of its sprawling global business in order to focus on competing against Amazon in the US, selling its 600 Asda stores in Britain makes sense.
Why should I care?
For markets: Sainsbury’s shares moved up a shelf.
Under the terms of the deal, Sainsbury’s will pay Walmart around $4 billion in cash while also making it the biggest shareholder in the combined company (which, while retaining the separate supermarket brands, would eclipse Tesco as the UK market leader). Although the deal will likely be reviewed by UK competition authorities – not least because of valid concerns about supermarket suppliers being squeezed – investors got excited, sending up shares in much-maligned Sainsbury’s by 20% on Monday morning.
The bigger picture: Supermarket operators are being hit by an unfortunate confluence of events.
The cost of importing stuff into Britain – and grocers import a lot – has increased as the pound has fallen in value. Higher costs mean grocery chains want to raise prices, but tough competition with discounters means they also need to be cheap enough to lure in customers. Grocers’ margins (a.k.a. the gaps between what they buy stuff for and what they sell it for) are thus under extreme pressure: profits earned by UK grocers like Tesco have halved in the past three years.