Terrified retailers take heed: Only the paranoid survive, says Margareta Pagano

Dave Lewis must be feeling grumpy. Just as the Tesco boss was getting the retailer back on track after several miserable years fighting off the discounters, he has been blindsided by a blockbuster deal that will knock the king of food retailing into second place.

Lewis might even be wondering whether the £14 billion merger between Sainsbury’s and Asda, owned by America’s Walmart, is actually his own fault. It could be that Sainsbury’s was emboldened by the decision of the Competition and Markets Authority to approve Tesco’s merger with Booker to come up with his own Asda bombshell.

Only Sainsbury’s Mike Coupe and Asda’s Roger Burnley know the answer to that, but it would be the most delicious irony. They, like the rest of the industry, were stunned that the CMA allowed Tesco to take over Booker’s wholesale business because of fears over reduced competition and pressure on suppliers.

That the CMA did not demand disposals from Tesco suggested a more relaxed approach to food retailing after the huge success of German discounters Aldi and Lidl, and the looming presence of Amazon. This time, the CMA will have to be much tougher in investigating the Sainsbury’s-Asda combo, which will have 31.4% of the market with sales of £50 billion and 2800 stores. It will need to be persuaded that the top two supermarket giants will not have the power to squeeze suppliers or push up prices for customers as together, the new mega-grocer and Tesco, will have almost 59% of the market between them.

Sainsbury’s and Asda will argue that the old arguments about having four big players to ensure fierce competition are out of date, that the dynamics of the food-retailing market have changed because of the insurgent discounters, Aldi and Lidl, but also the potential of Amazon, which now owns Whole Foods, and has a delivery partnership with Morrisons.

They will also claim that the long-term threat from Amazon — and other online retailers — will be a brake on jacking up prices to customers or squeezing suppliers. They would be right: look at how the internet has ravaged other industries. It’s already happening in food. Today the big four — Tesco, Sainsbury’s, Asda and Morrisons — account for 69.3% of the UK market, down from 76.3% five years ago.

The decline of their share is mainly because Aldi and Lidl are growing like Japanese knotweed, spreading into every crack of their rivals’ business. They now have 7.3% and 5.3% of the market respectively, and have no plans to stop. Aldi aims to double its stores to 1000 over the next few years, and Lidl is opening another 50 or so a year. This suggests that the fierce pressure on grocery margins — down to 2% — will continue, and that the big four’s market share will also keep falling.

Then there’s Amazon. Everyone is terrified, and rightly so, by what Amazon might do next. When Amazon bought Whole Foods last year, Walmart’s shares crashed by several billion dollars within a few minutes. It probably suits the US giant to let Sainsbury’s take control of Asda in the UK so that it can concentrate on challenging Amazon on its home turf.

In Britain, Amazon owns only nine shops and is experimenting with delivering fresh foods made by Morrisons’ Pantry business via Prime. It’s still tiny in grocery. But it has a huge customer base, and even bigger ambitions to supply and deliver fresh foods to your home — and maybe now your car.

Retail expert Nick Bubb predicts the CMA will allow the merger to proceed, but only after some hectic horse trading over which branches to sell. He says Sainsbury’s will be hoping for a Goldilocks solution whereby the new group does not have to sell too many stores or too few, otherwise the deal will not be worth pursuing. That’s going to be tricky for the CMA. If it gives in too easily, it will look toothless and there will be a political outcry.