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Asda/Sainsbury’s Merger Sends Shockwaves Across The Retail World

The news of a pending merger between Sainsbury’s and Walmart owned Asda is sending shockwaves across the British retail world. It should also be doing the same on a global scale, as it speaks to both an intense concentration of market share and the continued shift in thinking of the world’s largest retailer from a physical to a digital point of view.

The deal is expected to be announced shortly but must pass regulatory approval from the Competition and Markets Authority (CMA). If approved, the combined chain would have 2800 stores and a 31% market share, which would vault the prior number 1 and 2 chains slightly ahead of market leader Tesco.

I believe that a deal like this would have been unheard of in the U.K. as early as ten years ago for a multitude of reasons. From a market positioning standpoint, Sainsbury’s had been the historic “upmarket” chain, focused on higher income markets like London whereas Asda focused on large, out of city locations with a focus on price. Now, Waitrose has supplanted Sainsbury’s on the premium end and the two large German discounters, Aldi and Lidl, have gobbled up market share in the value sector. The result has been increased pressure on profitability in the sector for some time.

Perhaps more critically for the future, the U.K. has a rapidly evolving grocery e-commerce business, with pure play retailers like Ocado shaking up the market, the traditional players like Tesco heavily invested and Amazon teaming up with number four Morrisons on a distribution agreement.  Combined, these factors should underscore the shifting market and likely lead to this deal’s approval.

On a global basis, this merger is even more remarkable:

  • It is a merger, at least as it is understood today. This is not simply Walmart gobbling up another competitor but actually signifies them taking a backseat in the combined company. Asda had been Walmart’s single biggest deal to date but does seem to represent a significant drawback from brick and mortar retail.
  • Walmart is simultaneously looking at a $20 billion acquisition of India e-tailer Flipkart. They have been in a battle of sorts with Amazon over the company but look to emerge as the “winner” (if paying $20 billion for a market leading but money losing company is a win). This would catapult them ahead of Amazon in the rapidly growing Indian e-commerce market and perhaps make up for what appears to be a missed opportunity in China.

If I needed any more evidence that retail is undergoing an historic sea change, these two headlines in tandem help dispel any doubts. And, of course, with any massive deal like this, the repercussions could be equally as enormous and unleash a set of equally significant moves.

Neil Stern for Forbes

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