By Martinne Geller
The Sainsbury deal to buy Asda, announced on Monday, comes as retailers on both sides of the Atlantic grapple with heightened competition from the discounters such as Germany's Aldi and Lidl and e-commerce giant Amazon.
The marriage of Britain's second- and third-largest grocers will not immediately impact Amazon's food offering which remains small in Britain. The biggest impact will come away from the grocery aisle, in the area of general merchandise, where Amazon and Sainsbury's already go head-to-head.
Britons are among the world's most comfortable online shoppers. About 22 percent of non-food purchases are already done online, the highest percentage for any country aside from South Korea, according to Shore Capital analyst Clive Black. He estimates that Amazon has about 40 percent of that market.
"The UK is a very important market in terms of Amazon's international ambitions ... and will remain an important market," Black said. "This proposed merger makes it a little bit more competitive, but I don't think Jeff Bezos will be losing sleep over it."
Amazon is Britain's largest online retailer overall, with 30 percent of the market, according to Euromonitor, followed by eBay
ADDING SCALE, REDUCING PRICES
Sainbury's significantly boosted its online presence with the 2016 acquisition of general merchandise chain Argos, which expanded Sainsbury's product line to over 90,000 non-food products from computers to garden furniture to wedding rings.
Argos will get a big boost from the combination with Asda, as Sainsbury's plans to install branches of the chain inside Asda stores.
The deal will also add scale to Sainsbury's non-food offerings, especially in clothing. Asda's George brand and Sainsbury's Tu brand will together become a larger No. 2 player, by volume.
The merged Sainsbury and Asda chains will also seek to bolster their online business, using its enlarged footprint of stores and warehouses to deliver products faster and over a wider area.
Aside from the pricing pressure on suppliers that would come in any retail consolidation, Sainsbury's said it aimed to reduce prices by around 10 percent on everyday items, easing the burden on Britain's shoppers.
Sainsbury's said about 350 million pounds of the 500 million pounds of synergies it has identified will come from eliminating pricing discrepancies between the two chains.
AMAZON'S AMBITIONS
Amazon sent shockwaves through the retail industry when it agreed in June 2017 to buy U.S. upscale grocer Whole Foods Market in a $13.7 billion deal. Since the merger closed in August, Amazon has cut grocery prices, added lockers for picking up online orders in stores and started selling its suite of Echo gadgets in stores, too.
But in Britain, the food market is about 60 percent controlled by the top five players Tesco, Sainsbury's, Asda, Morrison's
Amazon is testing AmazonFresh, which offers same-day delivery but its overall share of the market however, remains tiny.
"Sainsbury's and Asda are very aware of a potential Amazon acquisition in the UK supermarket industry, which is why they are looking for scale in order to safeguard their future," said Philip Benton, a consultant at Euromonitor.
Hargreaves Lansdown analyst Laith Khalaf said the combination of Sainsbury's and Asda, and the pricing pressure that comes from it, could make the UK slightly less attractive for Amazon, but didn't think it would be a deal-breaker.
"It raises a question mark probably for anyone who is thinking of entering the market," Khalaf said. "We're not entirely sure to what extent Amazon is committed to the UK grocery market, but this may give it pause for thought."
He noted however that Amazon's size, scale and profitability allow Amazon to often forego immediate concerns around profitability.
"They're usually willing to take a hit if they think there's a long-term game they can win," he said.
The deal perhaps "will amp up the potential of a store strategy" for Amazon, said Tom Furphy, former vice president of consumables and AmazonFresh, and now chief executive of Consumer Equity Partners. "But they tend to not be reactive to competition in favour of focusing on their own innovation."
Investec analysts said the UK was already one of the most consolidated grocery markets in the world, pointing to Tesco's
If Amazon wanted to buy another UK grocery retailer, the only one it probably could not buy, according to Shore Capital's' Black, would be Sainsbury's, because of the non-food overlap. Tesco would fit well, he said.
However not everyone predicts Amazon will buy another brick-and-mortar retailer, given its business model revolves predominantly around e-commerce and they will have learnt some important lessons already from the purchase of Whole Foods.
"They got something out of the Whole Foods deal, which gave them a brand, credibility in the food space and knowledge of the food supply chain," said investment banker Shaun Browne of Houlihan Lokey. "I think they will feel that's what they need, and after buying Whole Foods they don't really need the purchase of a Tesco or Sainsbury's."
Amazon declined to comment, and Walmart did not immediately return a request for comment.
(Additional reporting by Jeffrey Dastin in San Francisco and Nandita Bose in New York; editing by Vanessa O'Connell and Clive McKeef)
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)