United Kingdom / Analyst Insights
Stacking up: Supermarkets Fight for Market Share

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by Frances Luery, Industry Analyst
Jul 31 2018

The Supermarkets industry (IBISWorld report G47.110) has undergone radical upheaval over the past five years. Extensive changes in consumer shopping habits and the aggressive expansion of discount supermarkets Aldi and Lidl have shaken the industry. Supermarkets have begun to develop a taste for mergers and acquisition deals now that opportunities for organic expansion are in short supply.

The past 18 months have seen the three largest UK operators– Tesco, Sainsbury’s and Asda – undertake major deals to expand their reach. In January 2017, Britain’s biggest supermarket retailer, Tesco, reached an agreement to merge with Booker, the UK's largest wholesaler. The £4 billion takeover deal was approved and finalised in March 2018. As a result, Tesco became a major supplier to competing small retailers, serving 125,000 independent convenience stores as well as 468,000 restaurants and pubs.  Less than five months later, Tesco announced plans for a strategic alliance with Europe’s largest retailer, Carrefour, in order to secure better deals with suppliers.

In 2016, Sainsbury’s acquired Home Retail Group plc, the parent company of catalogue retailer Argos and furniture retailer Habitat, for £1.4 billion. Sainsbury’s has successfully incorporated concessions into stores, expanding its reach in the wider retail sector and achieving cost synergies. In April 2018, Sainsbury's entered into talks with Walmart-owned Asda as part of a proposed tie-up between the two retailers. This is due to be completed in the second half of 2019, subject to approval by the CMA. The combined market share of the second and third largest supermarket brands in the United Kingdom is expected to be between 25% and 30%, nearly double the current year estimate for Tesco.

The flurry of merger activity in the industry has not been confined to the traditional supermarket giants. In August 2017, health food retailer Whole Foods was acquired by Amazon, integrating the grocery chain into Amazon’s sales platform. Morrisons also has a tie-up with Amazon to supply products for the company’s Prime Pantry. The CMA also gave the green light to a proposed takeover of wholesaler Nisa by the Co-op Group for £143 million, increasing its scale and buying power of the Co-op brand. The Co-op-Nisa deal was completed on 8 May 2018.

It’s not hard to see why so many brands are choosing to fuse their businesses. The retail sector as a whole has seen an increase in merger activity in recent years as changing consumer spending patterns have led to stagnant sales growth in the sector. Retailers aiming to shore up their position and widen their market share favour takeovers to boost growth.

Big brand supermarkets have also faced added pressure from the growth of German discounters, Aldi and Lidl, over the past five years. In 2012-13, IBISWorld estimated Aldi’s market share to be 1.6%. Five years later this share had risen to 5.6%, making it the fifth largest supermarket in the United Kingdom. The cost pressure placed on incumbent supermarkets by the growth of these low-cost brands has constrained industry margins, with supermarkets waging a price war in order to defend their market share. Liaisons between groups allow them to achieve economies of scale through lower costs. Joint efforts also have more bargaining power with suppliers, enabling them to negotiate lower prices and giving them the upper hand.

It’s not yet clear what lasting effect the mergers and collaborations will have on the industry. The Asda-Sainsbury’s deal has yet to receive full approval from the CMA as the regulatory body combs over the implications of a supergroup. If the deal gains approval, the newly created behemoth would have 2,800 stores across the United Kingdom, including the Argos business which was previously acquired by Sainsbury's in September 2016. Analysts and politicians have expressed concern over what effect these major bargaining alliances could have on suppliers. Coordinated negotiating techniques from buyers are likely to put pressure on suppliers to cut prices, ultimately eating into producer’s operating margins or even forcing out smaller operators.

Mergers also infer weaker competition between enterprises. As major players amass power through strategic alliances, smaller independent companies will find in harder to challenge their dominant position. Ultimately this comes at a detriment to the consumer, who previously could benefit from lower prices as Aldi and Lidl expanded.

Going forward, particularly if Asda and Sainsburys are successful in their merger, more grocery retailers are likely to follow suit in order to safeguard their precarious market share in the increasingly hostile retail sector.

For a printable PDF of Stacking up: Supermarkets Fight for Market Share, click here.

IBISWorld industry reports used in this series:

R92.000   -   Gambling and Betting Activities in the UK
G47.730   -   Dispensing Chemists in the UK
G47.110   -   Supermarkets in the UK

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