J. Sainsbury Plc, owner of Sainsbury’s supermarkets, Argos order-and-collect platforms, and Habitat home and furniture stores, announced plans to take operational control of long-term rival Asda from Walmart International on Monday 30 March. Should the merger clear competition authority and shareholder review, the new Combined Group will edge out Tesco as the largest retailer in FMCG categories, and will have overwhelming number one shares in non-food categories such as home goods, electronics, and clothing.
The merger brought up new questions for the future:
- Is bigger actually better? There are at least two possibilities. First, that economies of scale will allow the combined company to more efficiently fix important gaps. Second, that any challenges that existed pre-merger will become even bigger and more complex.
- Is this retail apocalypse version 2.0 or “true synergy”? Will the group be forced to shut down stores, send staff home, and ask for more patience from shareholders, or will they find a more efficient way to grow profits and topline revenues?
- Will the group’s eCommerce team be the best funded and the most talented digital team in the UK? Will this merger change the dynamics in UK eCommerce with new talents, new vision and new capabilities?
- Will Walmart’s pivot towards new services, such as proposed acquisition of US healthcare provider Humana, usher in a new era of services for the UK as Walmart plays a new role as partner to retail rather than owner and operator of retail?
For branded suppliers, this merger will result in the UK market changing from the home of “the Big 4 supermarket groups” to an alliance of “3 global multichannel” operators. J. Sainsbury Plc’s alliance with Walmart becomes the number one retail alliance in the market, followed by a new look Tesco backed by Booker Wholesale, with Morrisons in a very loose partnership with Amazon rounding out the three.
Walmart will continue to play a role in the new group in areas such as global purchasing, best practice sharing, and efforts to internationalize strong elements from the Group’s portfolio. The new Combined Group will transform the UK retail market dynamics creating a new retail ecosystem through general merchandise and services solutions. Walmart will have 42% share in the new Combined Group and may see incentives to invest in new initiatives from time-to-time. Walmart has already announced its hopes that it can find ways to bring Argos-style solutions to more locations around the world.
The merger reflects the shifts in Walmart’s globalization strategy. Competitors such as Alibaba and Amazon are quickly out-globalizing Walmart through asset-light and service-based global platforms. Walmart is keen to close the competitive gaps before it is too late. Markets such as US and Canada drive growth through scale for the global retail giant, whereas China is the new innovation hub. Although Asda has served Walmart well over the years in terms of bringing in the latest ecommerce innovation, the role of the business has changed in the recent years. Today, Walmart is looking to minimise its exposure to Asda’s operations while driving cash returns through procurement. Merging with Sainsbury’s is a great solution for Walmart to reposition its big yet challenging UK operation.
The merged business will create a new retail market leader in the UK, as the combined market share will reach 31.4% according to Kantar Worldpanel data (12 we 18 March 2018), and a total of £51bn sales in 2017 according to Sainsbury’s. The Combined Group also aims to lower prices of everyday items by 10%. This will largely be driven by Walmart’s global buying power, but also includes other measures and synergies. Looking beyond the disruptive impact on FMCG grocery, Kantar Consulting believes general merchandise and services will be the truly transformative aspects of the new business.
The British retail market has changed drastically over the years, facing multiple disruptions from discounters to Amazon. Shopper habits have changed, and the weekly drive-up shopping is in decline. The Big Four compete to win shopper loyalty, and this is increasingly done through creating a total-solution retail ecosystem. Amazon’s Prime ecosystem is an obvious inspiration, extending from fulfilment to entertainment, and even banking.
The Combined Group will look to leverage the total portfolio, cross-pollinating brands across stores and online platforms. Asda and Sainsbury’s store networks are highly complementary, and the Combined Group will leverage Asda’s expertise in big box, together with strong convenience offer of Sainsbury’s. Excess space utilisation may be done through new concessions, such as Argos at Asda. Walmart’s global innovations and new service partnerships may come to the UK market: From potential investment in Flipkart to partnerships with health insurance companies, Walmart is widening its portfolio to serve shoppers better in all fronts.
For further analysis and insight into the supplier implications of the merger, and how Kantar Consulting can help you to navigate this new key account, please read our full report.