Keynes is regularly credited with saying that when the facts changed, so did his opinion. A more pertinent question in retail is whether facts have changed enough to alter the regulator’s view on mergers.
In 2019, the Competition and Markets Authority blocked the proposed takeover of Asda by J Sainsbury, saying the deal would lead to higher prices and less choice.
In doing so, it in effect ruled out any combination of the so-called “big four” — Tesco, Sainsbury, Asda and Wm Morrison — that had dominated food retail for 15 years.
Three years on, rampant cost inflation is squeezing grocers’ profit margins, making consolidation potentially attractive. And two supermarket chains are now owned by private equity groups, which will at some point want an exit from their investments.
So have the facts changed enough to allow one big supermarket to buy another?
The biggest shift relates to market share. In its deliberations three years ago, the CMA cited a forecast that the discounters Aldi and Lidl would have 14 per cent of the UK grocery market by 2023.
But their share is a full two percentage points above that level already and would probably be higher still but for the pandemic. Aldi’s elevation to the number four spot at the expense of Morrisons grabbed attention, but the recent expansion of Lidl has been even more rapid.
Its market share is now more than 7 per cent, up from 5.5 per cent in 2018, and crudely extrapolating the past relationship between store numbers and market share implies it could be higher than 8 per cent by 2025.
And while the operating models of discounters and full-range supermarkets remain very different, in terms of products and shoppers there is more and more overlap.
Traditional grocers have launched budget own-label ranges to compete with discounters and they now price-match many of their key product lines to Aldi rather than to each other.
Discounters meanwhile have introduced more premium lines to compete with full-range supermarkets. Aldi has launched online shopping. Lidl now has a loyalty scheme. To treat discounters as an entirely separate sector that caters to a discrete subsection of shoppers, as the competition regulator’s original investigation in effect did, no longer looks realistic.
On that basis it is possible to argue that the growth of Aldi has already taken the UK back to a big five, the situation that prevailed through much of the 1980s and 1990s and ended when Morrisons acquired Safeway in 2004. Or possibly even a big six, given that Lidl’s share now is bigger than Morrisons’ was in 2004.
The political landscape has also changed. The general assumption in Westminster in 2019 was that suppliers and consumers would pay the price for combining Sainsbury and Asda. A pledge to use the merged group’s cost savings and enhanced buying power to cut £1bn off prices fell largely on deaf ears.
It is harder to see that kind of commitment — it is double Sainsbury’s current price-cutting ambitions — getting such short shrift in today’s inflationary food market.
Those involved with the Sainsbury/Asda deal contend they were simply unlucky to come up against an unusually politicised regulator and that in another era the transaction would have been allowed with some local remedies.
Some also wonder whether a more overtly pro-growth government alongside changes at the top of the CMA may herald a more accommodating stance on mergers.
Neither thesis is quite right. Although the CMA’s predecessor allowed Morrisons to buy Safeway, it barred Tesco, Asda and Sainsbury from doing so. It may have waved through a series of deals in fuel retailing recently, but nobody watching the JD Sports/Footasylum saga could reasonably conclude the CMA is going soft.
An early test of whether facts have changed enough to alter conclusions could come in another sector where four-into-three mergers were until recently frowned upon: telecoms.
If Ofcom and the CMA allow Vodafone to merge with Three, talk of consolidation in food retail might just begin to pick up again.