“The Sainsbury’s  – Asda announcement certainly caught everyone by surprise, and looks like a purely defensive move from Sainsbury’s perspective. 

“Digging below the surface, we might read this as being phase two of Sainsbury’s strategy of pushing into the discount market – with Asda traditionally having a reputation for value and a core customer base which is, generally speaking, a different demographic to the average Sainsbury’s shopper. There are also geographical factors at play here, with Asda strong in the North and Sainsbury’s in the South.

 “Clearly, by bringing the businesses together the overall company will wield much greater buying power and will likely be better placed to negotiate better deals from suppliers. Any cost reduction strategy will be brought to bear strongly in the price war with the discounters. This speaks to the wider disruption caused by the discounters, with Sainsbury’s just taking a different tack to Tesco – who, with the Booker acquisition, pursued a vertical push into the supply chain, rather than a purely horizontal, retail to retail, merger to improve buying power against the supply chain. 

“Sainsbury’s tried to move into discount before with Netto, but met a number of hurdles. Not least the fact that Netto did not have the footprint and market penetration to make an immediate impact; it must be remembered that it took Lidl years to build up enough of a market share to make the big boys sit up and take notice. With the Asda deal, Sainsbury’s is potentially getting a huge footprint and loyal customer base which, together with the prospect of reduced supplier costs, on paper looks like it could be a formidable discount operator. Further, WalMart historically held a tight rein on prices and discounts, and Asda may now have more opportunity to take a targeted approach to price reductions. 

Property questions 

“All eyes will now be on the CMA but, should the deal progress, everyone will be closely watching what happens to the combined business’s property portfolios should the CMA force a sale of stores. 

“Even in the case of retained stores, Sainsbury’s will be acquiring some significant issues.  The extent to which the Asda Stores holding company continues to operate, and whether Sainsbury’s decides to, or is able to, guarantee the status of Asda stores may have a real impact on landlord relationships and negotiations going forward. It is possible that we will see some sort of restructure in the future, with retailers often turning to mechanisms like CVA’s, even in businesses that are performing well, to force a conversation with landlords. 

“At the same time, it shouldn’t be forgotten that both Asda and Sainsbury’s sweet spot is in food retail, and many of the stores Sainsbury’s are acquiring are just too big for the market these days. The fact is that many food retailers are now facing the challenge of having significant surplus space because of historic expansion strategies – an issue Sainsbury’s itself sought to mitigate with the acquisition of Argos. Asda’s policy has generally been based on very large volume stores and, while it has a decent non-food range, the format on the whole is not optimised around the core food product. 

“Sainsbury’s have found it easier to downsize in line with changing consumer habits having historically purchased sites which are more appealing to alternative users. Furthermore, the Sainsbury’s brand is, generally speaking, more likely to secure interest from third parties looking to take adjacent sites or surplus space. Asda has struggled with this, and will now really have to up the ante to ensure that their large stores are optimised and performing well. 

“There is, though, the real possibility that we may now finally see an Asda convenience store. This hasn’t really been looked at before, but Sainsbury’s have the track record and there are certain locations where such an offer could be highly appealing to the consumer. 

“Looking ahead, if the CMA forces a fire sale of stores, the irony is that the likely buyers are just those brands – Aldi and Lidl – who Sainsbury’s are looking to defend against.”

Richard Curry is a partner in Rapleys’ retail and leisure group. 

He has over 30 years’ experience dealing with all aspects of agency and has dealt with high street, development and investment management. He specialises in the food store sector, especially in the acquisition of convenience stores and supermarkets. He also regularly advises on the sale of trading stores.

Richard is principal agent advising New River Retail on the asset management of their public house estate.

Richard joined Rapleys in 2006, having previously spent 3 years at Somerfield Stores, where he was property manager responsible for subletting, downsizes and disposals.

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