Recent aborted merger discussions between Sainsbury’s and Morrisons have brought renewed focus on the strategic landscape of the UK’s supermarket sector and the likelihood of regulatory approval for such a significant combination.
Industry analysts suggest that the Competition and Markets Authority (CMA) would likely approve some form of a merger, a belief that must have underpinned the initial talks between the two retail giants.
Several arguments support the case for CMA approval. Firstly, the combined market share of Sainsbury’s (15.2%, according to the latest figures from Worldpanel analysts) and Morrisons (8.4%) would still remain significantly below that of the market leader, Tesco, which commands 27.8%. This contrasts with Sainsbury’s previous ambition to surpass Tesco through its failed bid for Asda in 2018.
Secondly, the growing influence of German discounters Aldi and Lidl, who collectively account for nearly a fifth of the UK market, acts as a strong competitive force. Their international buying power is seen as robust enough to maintain their role as price regulators, potentially insulating the market from significant negative impacts of a Sainsbury's-Morrisons merger.
Thirdly, Morrisons’ prior sale of its petrol stations removes a key area of concern for the CMA, which often scrutinises fuel competition in such deals. Finally, a potential argument could be made that integrating Morrisons' 18 food-processing factories into a stronger combined entity would bolster UK food security, a matter of increasing political concern, by boosting local production capabilities.
Despite these factors, CMA approval would not be granted without conditions. The regulator is expected to conduct a detailed, site-by-site analysis of local competition, assessing customer drive-times, similar to its approach in 2018. It is anticipated that the CMA would err on the side of intervention, demanding store disposals to maintain local competition, particularly given that such a merger would place approximately half of the UK's grocery trade in the hands of just two companies.
The potential for extensive remedies raises questions about the ultimate attractiveness of a deal. For Sainsbury's, the prospect of dedicating a year or more to regulatory negotiations and approvals presents a significant "distraction factor." The prolonged and demanding regulatory process associated with the Asda pursuit reportedly impacted the tenure of Sainsbury’s previous chief executive.
Crucially, Sainsbury’s current financial health suggests it is not under pressure to pursue such a deal. The group is presently gaining market share, maintaining stable profit margins, and has sufficient spare cash to engage in share buy-backs. Furthermore, it has successfully addressed strategic challenges by divesting its bank and Argos businesses. While a larger scale could offer advantages in negotiations with suppliers, the company's current position is considered robust.
The calculation for private equity-owned Morrisons, however, is different. Five years after acquiring the chain for £7 billion, owners Clayton, Dubilier & Rice are likely exploring exit strategies for their investment. A disposal of the company is generally considered an easier pathway than a stock market flotation, and Sainsbury’s is frequently identified as the most logical suitor.
The fact that Sainsbury’s was reportedly the party to walk away from the recent merger discussions indicates its strong negotiating position. The supermarket can afford to maintain its current strategy or await more favourable terms. For Sainsbury's, this potential merger is not currently regarded as an essential strategic move.
