Wednesday, 16 Jan 2019
Business

Admit it, Great Britain. You like your German grocers

In an Aldi grocery store overlooking the steep Kent coast in southeastern England, customers load their baskets. It's the same situation in a Lidl outpost in Oban, Scotland.

The British case with the no-frills German supermarkets started about ten years ago and shows no sign of weakness. And that will be crucial in determining whether the competition authorities approve Walmart Inc.'s acquisition of Asda for 7.3 billion pounds (£ 7.3 billion) and, if so, how much forced closures will be punitive.

The UK's competition and procurement authority will release its provisional findings early next year. This will be the first rapprochement between two major British grocers since German discounters have become an important force on the market.

In the past, the CMA felt that medium-sized stores of the type they operated did not provide a decent alternative to large supermarkets for a significant number of consumers, and therefore did not pose a competitive threat. But a look at many parts of the UK suggests that this assumption is no longer valid. The shops are busy and the parking lots are crowded.

Any change of heart on the part of the regulator should, at first glance, make it easier for Sainsbury and Asda to get the go-ahead, as the presence of the Germans can counteract the impact of the loss of one of the "four" great british. supermarkets. Even if the case ends up breaking, it's a good thing that the challenge posed by the discounters is recognized.

British grocers have certainly felt it for some time. Several years ago, they saw their profits plummet as they reduced their prices to compete. They have also reduced the size of some stores and simplified their ranges.

But we must take into account the competitive range of discounters: the Germans have their limits.

Aldi sells about 1,800 lines, while Lidl offers 2,000. This compares to 30,000 to 40,000 in a typical supermarket. They also mainly sell own-brand products, with only about 10% of Lidl's product lines consisting of major brands such as Unilever and Nestle SA. The proportion of surnames is even lower at Aldi, at around 5%.

For regulators, it's a dilemma. In part of the market – where buyers are happy to buy products under their own brand – the merger would not reduce competition much. But in another area, where customers want well-known names, the impact is potentially huge. And given the much smaller position of Wm Morrison Supermarket Plc, a duopoly between Sainsbury and Tesco Plc over the price of Heinz baked beans and Marmite could result.

The AMC could solve this problem by evaluating a so-called weighted share of stores, an approach advocated by Sainsbury and Asda, and used by the authorities to evaluate Tesco Plc's takeover of the Booker wholesaler. According to this methodology, Aldi and Lidl would be ranked according to the size of their competitive threat. This is a more complex assessment than the traditional approach of counting the number of Asda and Sainsbury stores in a given area and using the results to determine store closures.

A high score of 1 would be to rank the discounters as full competitors. A ranking of zero would mean that they are not at all a threat. Although the two extremes are unreasonable, it is easy to argue that Aldi and Lidl are important rivals. Adopting this view should make the regulator more likely to approve the deal and make the potential store closures less painful.

It is not certain that the CMA decides to use this test or to appreciate the strength of valuable supermarkets. And even if that happened, it would not solve all the problems of fusion. There may still be areas where there are too many overlapping stores. Officials said in September that the deal could result in a significant reduction in competition in 463 localities.

Their analysis will also have to take into account the impact on suppliers and concentration in other areas, such as Northern Ireland, the fuel market, online shopping and the non-food sectors. , including toys.

There are many reasons why this merger investigation might not end with a postcard.

But it should at least establish the regulator's point of view on the competitive threat posed by German discounters, which could set the tone for future operations in the UK grocery market.

To contact the author of this story: Andrea Felsted at afelsted@bloomberg.net

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a columnist for Bloomberg Opinion covering the consumer and retail sectors. She previously worked at the Financial Times.

© 2018 Bloomberg L.P.

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