Sainsbury's and Asda offer to sell up to 150 stores

Sainsbury and Asda have to offered to sell between 125 and 150 supermarkets, plus a number of convenience stores and petrol stations, to another grocery rival or a new entrant in a bid to persuade authorities to allow their merger.

The UK's second and third largest grocery chains, having earlier this week publicly pledged £1bn of investment in price cuts over three years, said the Competition & Markets Authority's initial objections to the merger were based on "a fundamentally flawed analysis".

In its initial response to the proposed merger the last month, the CMA identified a "substantial lessening of competition" in a total of 629 local areas for supermarkets, 290 areas for online and for 65 convenience stores, out of 2,000-plus stores owned by the two companies.

The CMA's analysis was made with an eye on the effect on shop prices and the resulting loss of competition in a local area, a measure called the gross upward pricing pressure index. While the CMA used a GUPPI of 2.5%, Sainsbury's and Asda said this was much too tight as the approval process of Tesco's acquisition of Booker implied a GUPPI threshold of 10%. For their disposal proposal, the pair used a threshold of 5%.

Sainsbury's chief executive Mike Coupe and Asda's Roger Burnley said: "We have asked the CMA to correct significant errors in its provisional findings.

"Its analysis fundamentally misunderstands how people shop today as well as ignores the intensity of competition and the dynamism of the UK grocery market, which evolves on an almost weekly basis."

The CMA, which has until 30 April to publish its final report, had suggested possible remedies including selling off one of the Sainsbury's or Asda brands, divesting large chunks of stores or even prohibition of the merger, but even with such divestitures its initial view was that "it is likely to be difficult for the companies to address the concerns it has identified”.

Sophie Lund-Yates, an analyst at Hargreaves Lansdown, said: "At first glance, the proposals look like a decent compromise in response to the CMA’s previous ruling, however, the proposed number of store sales is unlikely to be enough to appease the competition regulator."

With the supermarkets adamant the CMA’s investigation is laden with errors, and understandably unwilling to selling a larger number of stores or one of the brands, she said "there’s a fair chance today’s proposals simply won’t be enough to convince the watchdog that the merger between Asda and Sainsbury wouldn’t create a competition problem".