Is the grocery industry succumbing to merger fever?
It has already turned into a saga. Nearly ten months after announcing that they would be joining forces, Sainsbury’s and Asda merger’s plan has been torpedoed by the CMA. The reason being that it would weaken competition and have a negative impact on prices for customers. No doubt that this decision was hard to swallow for the two companies, especially given the context. They are both facing serious headwinds from discount chains and pure online players, and have to deal with the prospect of a potential hike of up to 50% on food prices in the likelihood of a hard-Brexit.
It is no news that the face of grocery shopping has changed significantly in recent years. And still, 9 out of 10 people visit a physical grocery shop every week while nearly half of Aldi’s customers come for the main weekly shop these days, compared with less than a quarter a decade ago. Also and in recent years, Ocado and Amazon have emerged as online competitors while Just Eat, Deliveroo and Uber Eat are taking market share into the takeaway meals category. People’s grocery shopping habits are unquestionably different today than they were a couple of years ago but the problem remains. A merger between Asda and Sainsbury’s would have only lessened the low-cost options available for a customer aiming or needing to save on its grocery. It was neither the time nor the place to let that merger happen.
And still, the grocery industry remains buoyant thanks to the newly announced M&S and Ocado’s £750m deal. While M&S started testing food delivery in 2017, it has not yet launched a service and a tie-up with Ocado would help fill that gap. But will it work? For starters, delivering groceries to customers’ homes is an expensive business. Last year, Ocado lost £44 million on a pre-tax basis. Besides, most Marks & Spencer food customers are small-basket shoppers (below £20), while Waitrose’s average customer basket size which is well over £100 and makes the delivery costs easier to swallow. All change is definitely challenging but partnering with Ocado will give M&S access to a larger range of products and a larger average basket size. It also spares the company the time, cost and risk associated with building its own online distribution infrastructure. However, these benefits come at a price and according to analysts M&S may be paying a high price for simply being late to the party.
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