Sainsbury, Asda accuse CMA of errors over merger call

Sainsbury's and Asda have promised to invest £1bn in cutting shop prices, improve conditions for small suppliers and sell stores as they urged competition authorities to change its mind over their proposed merger.

Last month the Competition & Markets Authority indicated it was not likely to allow the £13bn combination of the UK's second and third largest supermarket groups to go ahead due to "extensive" concerns, including a "substantial lessening of competition" across the country and at local level.

The CMA proposed the pair sell off a "significant number" of stores and other assets - potentially including one of the Sainsbury's or Asda brands, but said even so it felt it was likely to be difficult for the companies to address its concerns.

Following a meeting the CMA, Sainsbury's and Asda issued a statement on Tuesday that repeated their earlier opinion that they strongly disagree with the body's provisional findings and said the CMA's analysis contained "significant errors".

"This is compounded by the CMA's choice of a threshold for identifying competition problems that does not fit the facts and evidence in the case and that is set at an unprecedentedly low level, therefore generating an unreasonably high number of areas of concern," the companies said.

The pair said they had provided the CMA at the meeting with details of proposed supermarket and petrol forecourt divestments across both brands that they feel "would satisfy reasonable concerns regarding any substantial lessening of competition as a result of the merger by applying a conservative yet reasonable threshold".

Sainsbury's and Asda said on Tuesday that they had also committed to investing £300m in cutting prices in the first year after the proposed merger, with £700m invested over the following two years, with the combined aim of cutting "everyday items" by around 10%. These price cuts would be funded by the £1.6bn of cost savings the pair expect to make.

The price commitments, including a promise to cap profit margins on petrol sales, will be independently reviewed by a third party, with performance figures published each year.

"We are happy to be held to account for delivering on this commitment and to have our performance independently reviewed and to publish this annually," said Sainsbury's chief executive Mike Coupe and Asda counterpart Roger Burnley.

Sainsburys said it would match Asda's commitment to pay small suppliers within 14 days, covering all suppliers with turnover of less than £250,000.

The pair also said their £1.6bn of cost savings would fund the shop price cuts and deliver the commitments to shareholders of £500m of net synergies, low double-digit return on invested capital and double-digit earnings per share accretion by the end of the second full financial year.

The statement from Coupe and Burnley concluded: "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."

Recovering from recent lows, shares in Sainsbury's rose 3% to 241.0p on Tuesday, adding to gains on Monday after newspaper reports that the company was preparing to be more specific with the CMA.

Thomas Brereton, retail analyst for GlobalData, said Sainsbury’s, which has been the weakest performer of the Big Four retailers for some months, has been "treading water in a period of turbulence for supermarkets, losing out over the Christmas period to rivals as the mid-market continues to be squeezed by the discounters".

But he added: “By announcing clearer details of what post-merger plans would be – including a precise structure for price investment to reduce everyday prices 10% over the next three years, a suggested profit cap on fuel, and to dispose of a substantial number of petrol forecourts – Sainsbury’s are hoping to convince the CMA to reconsider."

He also noted that details of Ocado and M&S’s £1.5bn online venture have been published since the latest from the CMA, introducing a new variable into online grocery competitiveness evaluation, another issue previously flagged by the CMA, given that over 75% of the online market is controlled by the Big Four, Ocado and Amazon.

“For Sainsbury’s to forge on – with what many see as an already lost battle – shows how pivotal Sainsbury’s feels consolidation at the top end of the grocery market is in order to stop long-term share decline at the Big Four, to use economies of scale and pressure on large suppliers to reduce shelf prices for shoppers,” Brereton said.