The CMA, in fast-tracking its review of the Sainsbury’s/Asda merger to a detailed second phase, found that there was a realistic prospect of competition being lost in 463 local areas, and flagged at least seven ways in which consumers might be harmed by the merger. While these early findings need to be treated with caution, as their principle aim is to justify a second phase review, they also point to significant risks for Sainsbury’s and Asda when the CMA decides whether the merger should be permitted and the number of stores to be divested.

The challenge for Sainsbury’s and Asda is to present a compelling narrative about changes in grocery retailing that justify a more lenient approach by the CMA. This is particularly important for a second phase review, where decision making responsibility passes to a CMA inquiry panel made up of part-time members. The ingredients for such a narrative can be seen in the rise of Aldi and Lidl, more frequent convenience shopping, and the growth in on-line shopping. It will be critical for Sainsbury’s and Asda to avoid presenting a grab-bag of arguments, including those that have been previously fought and lost, which lack the coherence and consistency needed to persuade the CMA’s inquiry panel of the overall merits of their case.

Several potential difficulties, in terms of the overall consistency and coherence of the Sainsbury’s and Asda arguments, can be seen in the CMA’s referral decision. According to the CMA, the two grocers would like to blur the longstanding distinction between large one-stop supermarkets and mid-size stores. This argument has been made unsuccessfully many times previously, and the CMA is unlikely to take a different approach unless it can be justified by, for example, underlying changes in customer or retailer behaviour. The CMA also reports Sainsbury’s and Asda as arguing that customers are travelling longer distances to large supermarkets than the competition authorities have previously found. But, if customer behaviour implies a growing preference for convenience, as seen in the growth of convenience and on-line shopping, why would customers at the same time be travelling further to large supermarkets?

Perhaps more important is whether the CMA will treat Aldi and Lidl as competitors to Sainsbury’s and Asda like other retailers, such as Tesco and Morrisons. The CMA seems keen in its referral decision to hose down any interpretation of last year’s Tesco/Booker clearance as softening its historical position that the discounters’ stores do not compete as closely with large, full range stores as these stores do with each other. Moreover, Tesco’s launch of the Jack’s discount chain may well have dealt a significant blow to Sainsbury’s and Asda’s arguments on this point. If Tesco has opened a new store format to compete more effectively with Aldi and Lidl, it makes it hard for Sainsbury’s and Asda to argue that Aldi and Lidl are close competitors.

If the CMA’s concerns are limited to the merger’s effect on competition in local grocery markets, and Sainsbury’s and Asda make limited progress in persuading the CMA that it should change its approach, then merger clearance is likely to be dependent on store divestitures. A very back of the envelope estimate is that something in the region of 80-180 stores could be at risk of a divestiture requirement. (This compares to the 50 stores that Morrisons had to sell when it acquired Safeway in 2004.) A divestiture of this scale would face challenges in terms of ensuring stores were sold to other retailers without presenting further competition problems in local markets.

The CMA has also flagged the potential for concerns about the effect of the merger on competition in grocery retailing at a national level, independently of local market effects. This would be a significant change from, say, the groceries market investigation in 2007-08 where the emphasis was very much on competition at a national level being an aggregation of local market activity. However, the CMA and its predecessors have not always been consistent on this point. If there is a national effect, and this cannot be somehow assuaged through sufficient local store divestitures, then it would open the door to a complete prohibition of the merger.

On the upside for Sainsbury’s and Asda is the potential to argue that online grocery retailing has increased choice for customers and competition in local markets. In many cases, households can access on-line shopping from the major grocery retailers well outside the usual catchments that the CMA associates with physical stores. Whether the CMA is willing to accept this argument, however, remains to be seen.

Finally, the CMA will no doubt receive many submissions raising concerns about the merger’s effect on the food and drink supply chain, and the potential for adverse consequences. The CMA generally treats these arguments very cautiously, and I believe that the current make-up of CMA inquiry panels makes them even more likely to be cautious. Even in the groceries market investigation, which led to the revised groceries supply code of practice and the groceries code adjudicator, there was dissent on the panel about the findings and recommendations in this area. The Tesco/Booker decision showed the difficulties in evidencing each element of the chain of logic required for an adverse finding on supply chain effects.

All in all, the local and national competition issues mean that it looks like it will be a tough case for Sainsbury’s and Asda to make, but concerns about supply chain effects are likely to only play a limited role.

(An edited version of this post first appeared in The Grocer on 5 October 2018.)