Sainsbury's store external

By now you’ve heard the news about Sainsbury’s and Asda: Happy merger. This will enable Sainsbury’s to cut prices by 10%, give Asda £3bn in cash and a near-42% stake in the combined business. All 2,800 stores from both brands will remain open. Overall, this will give the new retail force a combined market share of 31.4%.

When—and if—it goes ahead, this is likely to be the largest shake-up of British retail since the 2003 Morrison’s-Safeway takeover. But what impact will it have?

 

The great squeeze

There were a number of contributing factors that likely led us to where we are today. One is the pressure being felt on the big four from above and below: from Waitrose and Marks and Spencer above, and from Aldi and Lidl below.

The new deal has been announced as Sainsbury’s revealed a near-19% fall in pre-tax profits, despite the fact that sales for the year improved 9% to £31.7bn.

 

Correcting the in-store mix

A further contributing factor is the need to fill excess store square footage. Shopping habits in the UK are changing, as they are around the world, from people completing a single weekly shop to more regular, smaller shops of essentials, store cupboard ingredients snacks and convenience options.

This ultimately means that at the end of the day, food is left on the shelves. Put simply, there is just too much food in our stores and nobody is buying it.

This new deal will mean we start seeing Argos stores in Asda. Sainsbury’s is planning to add a further 90 new Argos outlets to their Sainsbury’s stores in the next year, and this could be a good solution to the problem of having too much in-store space devoted to grocery—across both chains.

 

The pressure to innovate

It might also be a good way to combat the threat from Amazon Go, Whole Foods and their Just-Walk-Out shopping revolution. With Online and convenience becoming an ever-more important part of customer focus, innovation becomes a larger piece of the puzzle. By putting Argos into Asda, Asda are able to provide a broader range of products to its customers, at lower price points, with greater convenience.

This might also be a way that the deal gets pushed through the Competition and Markets Authority. If Sainsbury’s and Asda can prove that the new deal gives them a way to compete against the ever-growing dominance of Amazon then they have a chance of getting the deal through the commission. Whereas, if their argument is one simply around pricing, they could struggle. Playing the tech card gives them some leverage.

 

A bold step

From a brand identity perspective, even the suggestion of a merger seems to be having a positive impact, with Sainsbury’s shares improving more than 20% to 324p on confirmation of the deal, to their highest level since 2014.

Mike Coupe, Sainsbury’s CEO said the merger would “create a business that is more dynamic, more adaptable, more resilient and an even bigger contributor to the UK economy”. This is exactly what is needed in a market that is going through tumultuous times.

By combining buying power and producing a more closely integrated supply chain, the supermarket group will be able to produce £500m in cost savings through improved efficiency and better deals with suppliers.

But will this be enough to stop the rise of Aldi and Lidl? Probably not. Those chains have aggressive expansion programmes and an ever-improving brand perception. Plus, they’re building on a strong and efficient base. Sainsbury’s and Asda are having to fix what’s broken, and playing catch up is always more challenging.

Another question is how the visual identities of each brand will shift if the merger goes through. If Sainsbury’s has a majority share, will the Asda brand be subsumed into Sainsbury’s? Or will the two remain separate entities, with the group using Asda as a vehicle for penetrating the discount market, while Sainsbury’s becomes more competitive in the mid-ground? Time will tell.

As the design studio behind Aldi UK’s new store environment, we appreciate the impact of a strong, focused visual identity. Consumers need to understand what they are buying into. With Aldi, that’s a combination of amazing quality and unbeatable prices. What will the central brand message of this new coalition be?

There are plenty of questions and not many answers at this stage. The deal will take months to be worked through and we’re intrigued to see what happens. One thing we will say is that it takes courage to make big move in this marketplace so whatever the impact—positive or negative—we would expect it to be dramatic.

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