It was a three-month flirtation that fizzled out. Move on, nothing to see here.
But while the merger talks between Britain’s second and sixth biggest supermarket chains, Sainsbury’s and Morrisons, may have run their course by February, the dust raised by the unwanted public outing of the talks last week has far from settled.
Retail analysts believe the disclosure of the discussions between Simon Roberts, the chief executive of Sainsbury’s chief, and Sir Terry Leahy, the chairman of Morrisons and former boss of Tesco, has fired a starting gun on a potentially turbulent period of consolidation.
All over the Square Mile investment bankers are running the rule over every possible permutation of takeover and merger in a vast £200bn grocery industry that has seen remarkably little consolidation in the past 20 years.
Simon Roberts, the chief executive of Sainsbury’s, held mergers discussions with the chairman of Morrisons Credit: Reuters/Mina Kim
Indeed, not since “Mozzers” swooped on Safeway in a £3bn takeover in 2004 has one major UK supermarket chain swallowed another. That may soon change.
As veteran retail watcher Richard Hyman, a partner at RAH Advisory, put it: “Nothing is certain, but I think now it is more likely to be when, rather than, if.”
The underlying drivers for the urge to merge are not hard to identify. Wafer-thin margins of 3pc to 4pc – at best – at a time of rising costs, cut-throat competition and intense political pressure to keep a lid on prices mean it is a constant battle to deliver the returns investors crave. Greater scale gives supermarkets greater buying power, allowing them to squeeze even better deals out of suppliers.
At the same time, the market has evolved from the big four to the big six with the arrival and ascent of the German discounters Aldi and Lidl, making the regulatory hurdles to any merger rather less formidable.
Lidl chips away at Morrisons' customer base
Share of UK market
Tesco
27.3%
Sainsbury's
15.7%
Asda
15.0%
Aldi
8.5%
Lidl
5.4%
Morrisons
10.2%
Co-op
6.0%
Waitrose
5.0%
Iceland
2.3%
Ocado
1.4%
Source:Worldpanel by Numerator
Indeed new realities of the grocery landscape are now being formally recognised by the Competition and Markets Authority in a proposal to reclassify the pair as “large grocery retailers” rather than “limited assortment discounters” as they were before.
The change may sound technical, and it has yet to be formally adopted, but it has profound implications when the next merger or takeover proposal comes bowling along.
The assumption that any combination of the biggest players will be stymied by the regulators – as happened with Sainsbury’s and Asda’s ill-fated engagement in 2019 – no longer applies. Deals could go through with far fewer supermarket sites having to be sold and far less risk of reduced competition harming consumers.
Putting the orange-liveried grocer together with Morrisons would have created Britain’s second biggest supermarket chain with 23.6pc of the market, just behind Tesco’s 27.8pc.
So when will the mergers and acquisitions dam burst? “I’m not Mystic Meg, but stories like this act as a catalyst,” says Clive Black of Shore Capital. “It’s not a given that Sainsbury’s and Morrisons will merge, but it puts the whole sector in play.”
Tesco is probably barred from a takeover of a major rival because of its dominant share. Under Ken Murphy’s leadership, it appears to have gone down a different route with its current interest in acquiring Majestic Wine.
Meanwhile, the German twins are unlikely to want to acquire a full-service supermarket chain, according to Hyman. It would add complication to business models built around stripping out costs.
Aldi leads on competitive prices
Average price of 93 selected items
Aldi
£159.48
Lidl
£161.84
Asda
£186.71
Morrisons
£193.13
Tesco
£193.45
Sainsbury's
£195.01
Ocado
£208.64
Waitrose
£223.38
Source:Which?
The options for purely UK consolidation within the big six are therefore limited. But Asda – which, like Morrisons, is a private equity-owned, debt-laden laggard – is probably going to have to find a dance partner at some point. Some combination of Sainsbury’s, Asda and Morrison’s now looks inevitable.
Another longer-term scenario, raised by a leading industry figure this week, is a pan-European wave of consolidation creating champions hefty enough to take on US and Chinese giants who will ultimately look to muscle in on their patch.
“Alone we will be equal to one US state or one province in China,” the industry source says. “But together, we may have chance. Alone, there is no chance. So yes to consolidation. Sometimes it is desirable.”
Black is more sceptical, pointing out that many of the world’s biggest grocery retailers spent much of the first two decades of the 21st century unwinding global empires laboriously assembled by previous chief executives.
He points out that Tesco once operated in territories as far flung as America, Japan, China, India, Thailand, and Malaysia. Now only the central European outposts in the Czech Republic, Slovakia and Hungary remain outside the British Isles, and even they look destined to be cast off soon.
A Tesco supermarket branch in Devon, England Credit: Getty Images/Anna Barclay
More plausible, believes Black, is a raid from Amazon. The US tech giant has a balance sheet big enough to take on even Tesco, but has so far failed – by its own standards – in its own efforts to crack the UK grocery sector.
Amazon closed its 19 grocery stores last September after its till-free format failed to catch on with shoppers. The tech giant still has grocery operations here, though, in the form of Whole Foods, the US organic food chain it bought for $13.7bn in 2017.
Black believes there is scope for one or two more big mergers in the UK, likely involving Sainsbury’s, Morrisons or Asda, before a new phase that nobody has yet seriously considered.
He believes that if a new oligopoly is created through a spasm of consolidation, the next opportunity to create value for shareholders could be deconstruction and break up. He points to the food manufacturing sector, where, for example Unilever has demerged its Magnums ice cream business.
In the end, Sainsbury’s and Morrison’s nuzzling came to nothing. But the conversation, now in the open, has lit a spark that could trigger more corporate upheaval in the UK’s hyper-competitive supermarket scene than we have seen for a generation.
It is a prospect that the fee-hungry advisers and funders of the City will relish.
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