When the Competition and Markets Authority (CMA) published its damning provisional findings on the proposed merger between Sainsbury’s and Asda on February 20, many commentators thought the deal was dead.
The CMA said it was concerned the deal would lead to a substantial lessening of competition at both a national and local level, and highlighted its effect on the fuel retail market where it voiced concerns "that prices could rise at a large number of petrol stations". It warned: "The deal could lead to inflated fuel costs at more than 100 locations where Sainsbury’s and Asda petrol stations overlap."
It set out a range of options to address its concerns, which included "blocking the deal or requiring the merging companies to sell off a significant number of stores and other assets potentially including one of the Sainsbury’s or Asda brands to recreate the competitive rivalry lost through the merger."
But the two retailers have hit back claiming there were "significant errors" in the CMA’s analysis and offering commitments the PRA fears could destabilise the retail fuel market and force many independent dealers out of business. In their response, Sainsbury’s and Asda said prohibiting the deal would not be in the consumers’ interests because it would prevent "significant reductions in prices", which would result from the merger. Instead they proposed divestiture of stores and petrol filling stations (PFSs) where there would be significant loss of competition (SLC) in local areas because of proximity of premises. In addition they pledged to invest £1bn a year on price cuts across the stores, and committed to maintain low fuel prices.
However, the retailers disputed the CMA’s analysis of where SLCs occurred. According to the CMA, there were 132 local areas where an SLC could be expected for PFSs. However, the retailers’ advisers said there were around 38 SLCs. They also noted that many of these SLCs would be resolved by the grocery divestments, but detailed how PFSs might operate if they were sold to operators separately from their associated stores. They said the new operator would be incentivised to use a low-price, high-volume business model because of the location of a site adjacent to a supermarket, but they acknowledged this might not keep prices as low as they were previously. To remedy this they proposed to make a payment to the operator for every litre sold to keep prices down. The proposed amount of the subsidy was not revealed but it would last for the length of the site lease, or for a set period if the freehold was sold.
When it came to the PFSs remaining in the retailers’ ownership, the retailers acknowledged that Asda has a long heritage of offering low fuel prices, and the CMA’s fear that after the deal the Asda sites might revert to Sainsbury’s local pricing strategy, meaning that fuel prices would increase. To address these fears the retailers pledged that Asda’s current fuel pricing policy would not change. And they added: "In order to demonstrate their confidence in the synergies that will arise from the proposed merger in relation to fuel (as previously explained to the CMA) the parties are willing to commit to a cap on the gross margin of fuel sold under the Sainsbury’s banner, to confirm that customers will benefit as a result of the proposed merger. Sainsbury’s will commit to sell fuel at a price such that no Sainsbury’s site would make gross profit of more than 3.5ppl on fuel (regular unleaded and regular diesel) for a period of five years post-merger". They said compliance with the cap would be substantiated by a third party.
In a joint statement, Sainsbury’s chief executive Mike Coupe and Asda chief executive Roger Burnley said: "We are trying to bring our businesses together so that we can help millions of customers make significant savings on their shopping and their fuel costs, two of their biggest regular outgoings.
"We are committing to reducing prices by £1bn per year by the third year, which would reduce prices by around 10% on everyday items.
"We hope that the CMA will properly take account of the evidence we have presented and correct its errors. We have proposed a reasonable yet conservative remedy package and hope the CMA considers this so that we can deliver the cost savings for customers."
But PRA chairman Brian Madderson warned the proposals could cause immense damage to the rest of the retail fuels market. He said: "The proposed measures to save the struggling merger between Sainsbury’s and Asda will put thousands of independent petrol retailers out of business and decimate consumer choice across the UK, particularly in rural areas."
He pointed out that since 2000, nearly 70% of independent fuel retailers have been closed; a fact that coincides with the rapid growth of supermarkets and their entry into the fuel market.
Madderson added: "Some commentators rightly regard the proposals as a desperate bid to save the merger and the PRA agrees with the CMA’s fears that the merger will lead to reduced consumer choice and higher prices in the long run, through a substantial reduction in competition.
"The PRA and its members view the latest proposal from Sainsbury’s and Asda to cap fuel margins as unenforceable and running counter to the CMA’s guidelines that the remedies should not involve behavioural change that requires high level monitoring and enforcement.
"This latest attempt by Sainsbury’s and Asda to keep their merger afloat will lead to the closure of hundreds of often small, family-run businesses providing essential services to hard-pressed rural communities."
The CMA has a deadline of April 30 to publish its final report on the proposed merger. The two supermarkets have had a stormy relationship with the CMA, taking it to court to win an extension and being bitterly critical of its interim report. It remains to be seen whether they will be any happier when the final verdict is delivered.
Sainsbury’s planned takeover of Asda, announced at the end of April last year, would cause major changes to the dynamics of the UK road fuel market. Although the big four supermarkets only have 18.5% of the forecourt sites in the UK (around 1,550 out of 8,400), they hold a 44% share of the volume. Tesco is the clear leader with 505 sites and 16% of volume in the UK market, meaning its market share is greater than any of the big three oil brands, with BP on 14.3%, Shell on 13.7% and Esso’s 12.3%.
Sainsbury’s has 311 forecourts with a 10.2% market share, and Asda 320 sites with a 7.7% market share, meaning the combined entity would potentially be the market leader with a joint share of 17.9%. However, it remains to be seen whether the CMA allows the deal to go ahead, and if so how much its remedies will eat into that potential market share.
Market data from Experian Catalist 2018