The UK Competition and Market Authority’s decision to block the Sainsbury’s – ASDA merger puts the heat on Sainsbury’s chief executive Mike Coupe.

Whatever the rights or wrongs of the CMA’s decision, he has wasted a year chasing an impossible dream while its competitors took full advantage of the distraction. The UK supermarket giant’s results over the last year have been poor, with store standards falling noticeably, and it must now refocus on retail basics rather than pursue another big acquisition.

Coupe gambled on a deal that seemed impossible at first sight, but began to seem more plausible the more one looked into recent CMA decisions, and considered how the CMA would have to change its methodology to cope with a completely changed competitive landscape over the last decade – namely the establishment of Aldi and Lidl.

We had thought that the CMA would allow the deal on the proviso of around 170 supermarket disposals, which we assumed would be on the borderline of what would have been acceptable to the merging parties, who themselves finally offered to dispose of up to 150 stores, in what appeared a rather desperate late move.

But the CMA took a much harder line, finding 629 areas where substantial lessening of competition (SLC) would occur in its preliminary findings in February, which it only reduced to 537 in its final reckoning.

Even if the CMA had given them the opportunity, that would have been far too many to make the deal make any financial sense.

So, given how much money it invested in lawyers and advisers (some of whom had direct experience of the CMA), how did the merging parties’ expectations veer so wildly from the CMA’s calculations?

One reason appears to be the erroneous assumption that because the CMA’s changes to its methodology would have to include Aldi and Lidl as competitors it would treat them as having close to as big a competitive impact on their stores as Tesco and Morrisons.

Instead the CMA, based to some extent on its own survey of shoppers, decided that while the German discounters were competitors, they had a fairly low competitive impact.

We have some sympathy with ASDA and Sainsbury’s here – market share data over the last decade has seen a clear shift from the big four to Aldi and Lidl. While the discounters offer a different shopping experience to the big four (especially in terms of width of ranges) our research found that most shoppers thought these places to be suitable for ‘one-stop shopping’.

But the rejection of the merger leaves Coupe’s strategy in tatters. His rationale was that for Sainsbury’s to win market share it needed to cut prices on the back of the increased supplier leverage that the merger would bring. With that leverage gone, it will struggle to be as competitive on price as it had planned.

Coupe then must decide whether to look for more ways to cut prices, or rebuild its reputation for quality, which has undoubtedly suffered over the last year as management were distracted by the merger.

In the meantime, M&S is threatening to encroach on its territory, with plans to deliver its high-quality offer at better prices to entice customers to make it their main grocer.

Coupe will need to reassure investors at the preliminary results next Wednesday that he has a plan B.

Having digested Argos and then wasted a year chasing ASDA, the time for building inorganic scale is over, and Sainsbury’s must re-establish its basic retailing credentials.

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