A battle of the brands could be on the horizon in British supermarket land after Asda and Sainsbury’s announced a merger proposal

Sainsbury’s and Asda’s proposed merger has stirred up much intrigue but the challenges ahead are numerous with competitors like Aldi and Lidl primed to retain their slice of the market.

They are already among top UK supermarkets in terms of convenience but their merger is expected to drive prices down as well, which threatens another section of the market comprising discounters like Aldi and Lidl.

Asda’s merger with Sainsbury’s is the latest in a long list of big moves by large UK supermarkets including Tesco merging with Book, Sainbury’s buying Argos and Morrisons starting supply deals with Amazon and McColl’s.

The proposed deal is timely as, although Asda has been posting steady profit for Walmart for the last ten years, its long-term growth has suffered.

Retail consultancy Newton’s associate director Paul Harvey has forecast the road ahead.

Newton associate director Paul Harvey

Convenience is crucial

Asda and Sainsbury’s say they have no planned store closures following completion of their merger including locations where both supermarkets overlap with no competition from other brands.

Newton’s research shows that almost half (47%) of shoppers value convenience above all else.

It also found that in locations with two similar supermarkets, one closing halves operating costs and filters more than 50% of revenue to the store which stays open.

In the coming months, a key factor for Sainsbury’s and Asda will be the difference between their shopper demographics and whether they are varied enough to make it worth keeping both brands in the locations where they overlap.

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Becoming price competitive

Sainsbury’s has promised customers a price reduction of 10% following the merger with its rival but delivering on this will prove a mighty task.

The merging supermarkets will be able to cut prices after they consolidate their supply chains but only by about 2% to 5%.

Even when you combine this with the joining of their product ranges, which will reduce supplier costs, the pair will likely only be able to match Tesco for value.

This means Lidl and Aldi’s place in the market will remain theirs alone.

Government approval needed

The Competition and Market Authority’s (CMA) approval of Tesco and Booker’s merger indicates a recognition of the UK’s competitive and changeable supermarket landscape, and that bodes well for Asda and Sainsbury’s.

It will also be encouraged by the pair’s promise not to close any stores and therefore not cause any inconvenience for the customer.

Asda, merger

Internal challenges

Merging the Walmart IT systems with Sainsbury’s could prove to be a challenge with £600m reserved for capital expenditure primarily to move IT systems.

Additionally, neither brand will want to lose their well-established identities and will almost certainly keep separate head offices, which could also lead to various inefficiencies.

The UK supermarket sector looks as though it may be forever changed, but the challenges ahead present some uncertainty as to whether the process will be wholly positive.

If done correctly, however, the competition in the UK market will become sterner than ever and customers will have even more to choose from.