When the Big Fours of Tesco, Sainsbury and Asda were completed in 2004 with the merger of Wm Morrison and Safeway, Britain established a food retail oligopoly. This was followed by a period in which competition was suppressed, profits skyrocketed, and stock prices generally rose.
This is not an uncommon situation in the UK, where hypermarkets in all sectors ranging from banking to energy and telecommunications are often in the hands of a small number of large operators.
The result is a stream of largely ineffective reports from the competition authorities blaming consumers for not switching from one provider to another more frequently and suggesting ways to encourage change. These tend to lead nowhere: the oligopoly persists.
More recently, however, food retailers have broken with this dreary font. Despite fears that the huge Tesco would crush everything before, the competition has resurfaced, as exemplified by the spectacular advances made by discounters Aldi and Lidl. Lower prices have put an end to the post-Brexit loss of voting rights in real disposable income.
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It's not hard to understand why Sainsbury's and Asda want to merge their businesses. Both face the same plethora of problems that go far beyond the looting that has allowed German discounters to move from 5 to 15 percent of the market within a decade.
They were also squeezed at the top. Customers looking for a treat will rise in brands such as Waitrose and Marks and Spencer. The Big Four had to deal with profound changes in consumer habits; Open smaller stores for more frequent, easier buyers or set up expensive online channels to allow delivery to home. At the same time, they had to manage a huge inventory of slow-moving, large, out-of-town retail sheds with limited alternative use.
While the result was more innovation – and better business for customers – it was also expensive. Margins may have fallen, but demand for investment has not diminished. The loss of market share means less favorable conditions for suppliers and pushes margins into a downward spiral.
Of these two, Asda flirted more openly with this unattractive result. Under his American owner Walmart, he decided not to invest, to lead the group for money and not follow the herd to pursue expensive innovations. The consequences are reflected in the figures: While sales declined by 3 percent last year, operating profit fell by almost a third. Offering this decaying platform for a large share of a combined "Assbury" (as social media has already baptized) would give you a chance to change management and regain some of that lost value.
Sainsbury & # 39; s now has the know-how to improve Asda's outdated offering. Increasing his weight would improve his hand with the suppliers. This mass would be maximized by the lack of overlap in the two stores; Sainsbury is centered on southern England, while Asda is more dominant in the north.
What is less clear is whether such an agreement can be justified as being in the public interest. The couple will point out the recent and confusing decision of the Competition and Market Authority to not impose remedies on Tesco's merger with wholesaler Booker, although the latter plays a role as a large supplier of convenience stores. They will point to the rise of online supermarkets like Ocado and the ubiquitous threat of the giant Amazon.
These requests should be treated with caution. Market shares for the Big Four as a whole may have fallen: from 76 percent in 2009 to 70 percent last year. That's pretty much the share that the four largest chains had in 1998.
But that should not obscure the regressive nature of the deal. In practice, it would mean swapping a big four for a big two, with Sainsbury / Asda and Tesco each controlling about 30 percent of the market. Whatever the consequences for consumers, the prospects for suppliers would be grim.
In many industries, from banking to accounting, regulators spend their time wondering how to encourage challengers. The supermarket retailer has attracted exciting new entrants with attractive services. But some, such as online, remain in existence while discounters have gone before and again.
Before the authorities wave a gigantic merger, they should be careful not to rebuild the oligopoly, just as Britain is frustrating its efforts.