The CMA has blocked the Sainsbury’s-Asda merger, in a move that was entirely as expected. Regulators believe the deal would lead to increased prices, a reduction in the range and quality of products, as well as higher petrol prices.
Whilst the CMA may not be factoring in the German discounters enough into its calculations, this deal was always going to present serious problems.
As commented previously by The Armchair Trader when the CMA all but killed off the deal, the merger never looked like it would pass the CMA’s tests, however fickle the regulator may seem post Tesco-Booker.
Mike Coupe remains absurdly disingenuous. “The specific reason for wanting to merge was to lower prices for customers,” he said last week in reply. No one, least of all the CMA, fell for it.
Where to now for Sainsbury’s shares?
The real worry for Sainsbo’s is what now? Sainsbury’s is the squeezed middle, losing market share to discounters and simultaneously losing out to more premium brands. While Aldi and Lidl consistently gain market share and Tesco rebounds, Sainsbury’s is feeling the pinch. The worry is that it had no credible plan except this merger.
The recent performance in stores has been less than impressive. After rising 1% in Q2, like for like sales ex-fuel declined 1.1% in Q3 versus estimates for a roughly 0.3% drop. Total retail sales were down 0.4%. Customers may be a little cautious but Sainsbo’s should be doing better.
“At a time of gently rising inflation and improving real wages Sainsbury’s ought to be enjoying growth in group sales, says Neil Wilson, Chief Market Analyst at Markets.com. “There have been for some time question marks over the store offering and presentation, which is starting to look like a persistent problem. Following the Argos takeover and proposal to merge with Asda, there is a clear sense management is taking its eye off the basics, albeit Grocery sales did rise 0.4%.”
Argos also flopped with General Merchandise sales down 2.3%. Clothing was also down 0.2%. It does appear Argos sales have been a bit softer than the market anticipated despite the rollout of more shop-in-shops in the last six months and the investment in technology.
“Competion is fierce…”
Discounters are having a big impact, but with the exception of a mega tie-up with Asda it’s hard to see what Sainsbury’s is doing to combat them effectively without a new start.
“Competition is fierce, but it’s not just discounters like Aldi and Lidl parking their tanks on Sainsbury’s lawn,” adds Wilson. “Sainsbury’s did well when Tesco was facing problems and Morrisons was a long way short of where it is now. Both of those have undergone impressive turnarounds – the question is whether Sainsbury’s faces up to the fact that in core grocery at least it too needs to turn the ship around.”
Shares remain close to their multi-year lows and could further test those levels again before any turnaround can yield results