Sainsbury’s/Asda – why widespread store closures are unlikely

Written By:

Stephen Springham, Knight Frank

10 May 2018

5 minutes to read

Categories: Retail UK

• Retail sales figures from the BRC for April should be taken with a pinch of salt. For the four weeks to 28 April, total UK retail sales fell by 3.1%, or by 4.2% on a like-for-like basis. Rather than “the worst month since records began”, this was classic Easter timing distortion (Easter falling within this period last year but not this). The comp base was therefore growth of 6.3% overall and 5.6% like-for-like. Impossible to derive any meaningful reading from these figures.
• Positive Q1 trading performance and a full-year profit upgrade from Next. For the 14 weeks to 7 May full-price sales climbed 6%, a “better than expected” performance it attributed to unusually warm weather and improvements to the product range. In a pre-close annual update, fellow fashion retailer Superdry said it expected pre-tax profits to come in between £96.5m and £97.5m, towards the lower end of consensus forecasts. Global brand revenue surged 22.1% to £1.6bn in the 52 weeks to 28 April, driven by growth in its wholesale channel (+29%) and online (+26%). Over the year, store sales rose 3.4%.
• Morrisons’ total group sales for the 13 weeks to 6 May were up 3.6% on a like-for-like basis (excluding fuel), with the retail and wholesale arms each contributing 1.8% growth. Transaction numbers increased 0.7% during the period, while average number of items per basket fell 1.1% compared to a 6.9% decline during the same period last year. During Q1, the business opened two new stores, in Abergavenny and St Ives, as well as starting a supply partnership with McColl’s. The wholesale business is on target for £700m of annualised sales by the end of the year. 

Stephen Springham, Head of Retail Research:

Now the dust has settled on the proposed merger between Sainsbury’s and Asda, the initial hysteria on widespread store closures and staff reductions can be put into far greater perspective. 

We maintain our firm view that there will be minimal foodstore closures as a result of the proposed merger. CEO of the combined group Mike Coupe himself has provided assurances to the same effect. Despite cynical cries of “he would, wouldn’t he”, we believe this accurately reflects the combined group’s strategic intention. The combined group would not close many (if any) foodstores of its own volition. However, the Competition and Markets Authority (CMA) may well stipulate otherwise.

Likewise, it is inconceivable that the CMA will not investigate the proposed deal. The CMA is a notoriously difficult body to second-guess. But given historic precedents in its former incarnation as the Competition Commission, the likely CMA investigation will be undertaken on an asset by asset basis – each and every store will be analysed in the context of its local catchment. The exact parameters that the CMA will employ have yet to be determined. But there are precedents.

In reviewing the takeover of Safeway by Morrisons in 2003, the Competition Commission (the CMA’s predecessor) used the following metrics in its ‘Competition Test’:

• Focus solely on stores larger than 1,400 sq m (15,070 sq ft) – convenience stores were excluded from the analysis.
• Catchments defined by drivetime isochrones for each store – 10 minutes for stores in urban areas, 15 minutes for stores in ‘non-urban’ areas.
• Competitor set defined as Asda, Budgens, Booths, Co op, Morrisons, Sainsbury’s, Somerfield, Tesco and Waitrose – but not M&S, Aldi, Lidl or Iceland.
• Undertake a ‘Fascia Test’ in every catchment to assess the number of competing fascias (see above) and whether this changes as a result of the merger.
• Broadly speaking, catchments with three or more ‘competitor fascias’ were deemed to be ‘not a problem’
• Generally, only catchments where the ‘Fascia Test’ saw the number of ‘competitor fascias’ reduced to one or two were store disposals enforced.

For the CMA’s assessment of the Sainsbury’s/Asda portfolio, they will probably employ a similar methodology, albeit with revised parameters. Overlapping Sainsbury’s/Asda stores may not necessarily be at risk – particularly if they have a strong competitor set. ‘Vulnerable’ stores are those in catchments which contain only an Asda and a Sainsbury’s store, with limited external competition. 

In the case of Safeway/Morrisons, Morrisons was forced to divest 48 stores. Without knowing the CMA’s parameters, it is impossible to rule on Sainsbury’s/Morrisons at this stage. For the stores Morrisons was forced to divest, the strict process (controlled by the OFT) set out:

• Purchaser to be approved by the OFT to maintain as a foodstore and valued at open market value (with some competitive bidding)
• Can be forced to sell for grocery use with no minimum price if little interest
• Can be forced to sell to alternative use
• Can be forced to sell alternative store in same catchment if no interest.

In all likelihood, therefore, any forced disposals will not result in closures, but transfers to other operators. Only if there is no interest from other players will they cease to be a foodstore. But this would be hugely paradoxical – the CMA’s job is highlight locations which are anti-competitive. If they try to open them up to other operators and there is no interest, they are not as anti-competitive as the CMA decrees and you essentially have a circular argument.

And yes, this will be a very long, drawn-out process, possibly as long as two years. Don’t expect any firm conclusions anytime soon.