Don't Cry for Tesco
(Bloomberg) -- There's one big loser from J Sainsbury Plc's purchase of Walmart Inc.'s Asda: Tesco Plc. It will lose its crown as Britain's biggest supermarket by market share to a new rival. But that outcome is far from certain -- and not necessarily a bad thing.
Sainsbury's 7.3 billion-pound ($10 billion) acquisition of Asda will be subject to a lengthy antitrust review. CEO Mike Coupe has indicated that regulators will force only a limited number of stores to be sold -- but there's no guarantee of that.
Research firm Global Data estimates that a minimum 75 out of Asda's 584 stores will have to go. But industry executives I've spoken to reckon the ultimate figure could well be much higher.There may also be competition concerns in other areas: The combination of Sainsbury, Asda and Argos (which Coupe acquired in 2016) could lead to big concentrations of market share in areas like toys and consumer electronics. That could mean more disposals.
Then there the practical aspects of putting two big grocers together: integrating them will be a big distraction that could weigh on trading for years.
Even if Tesco did lose its lead, there are advantages to being the under-dog. Some of the supermarket's biggest innovations, such as the Clubcard loyalty program, were conceived as it was battling to overtake Sainsbury as Britain's biggest grocer in the 1990s. It might actually help galvanize Tesco as it implements its own 4 billion-pound acquisition of wholesaler Booker.
For Tesco's smaller counterparts, too, all is far from lost. Take Wm Morrison Supermarkets Plc. It's strong in the north of England and Scotland, so stands to benefit from any disruption at Asda. It might also be one of the few supermarkets capable of picking up the stores that Sainsbury is forced to sell. CEO David Potts has returned to opening branches. With a strong balance sheet and a new store design that is proving popular with customers, it could capitalize on any upheaval with a new wave of growth.
And if after that it found life more challenging, there are options. Morrison is already expanding its wholesale business. Co-operative Group's food arm could make a good partner, as could Iceland, which Morrison has looked at in the past. There is B&M European Retail Value SA, which could offer non-food and a convenience arm, although the discounter wouldn't come cheap. And let's not forget that Morrison supplies Amazon, so could be a potential target if it wants to expand in U.K. grocery.
Meanwhile, Waitrose and Marks and Spencer Group Plc face a fresh threat. Coupe could move the Sainsbury brand more upmarket, and he will now control what is the U.K.'s second-biggest clothing retailer by volume.
But given the competition hurdles, and the scale of the task of integrating Sainsbury and Asda, these rivals all have plenty of time to work on their response. They should make the most of it.
©2018 Bloomberg L.P.