J Sainsbury and Asda will provide a more specific commitment to cut prices as part of their response to the Competition and Markets Authority’s provisional verdict on their planned £7bn merger, according to people briefed on the process.
They also said the supermarkets would recalculate a key indicator of consumer harm using what they consider to be more realistic criteria, and submit a counterproposal for store disposals. Analysts had previously estimated between 100 and 150 stores would need to be sold.
When Sainsbury’s announced its plans to acquire Asda last year, the two companies pledged to reduce the price of “everyday items” by at least 10 per cent, but did not specify how many or which products. However, that was not enough to prevent the CMA stating that more than 300 stores would have to be sold if the deal were to have any chance of securing approval.
In their new submission to the CMA, Sainsbury’s and Asda will publicly detail a commitment to annual savings for shoppers, a number that was previously supplied to the CMA but redacted from its report.
“They are really doubling down on the cost savings to consumers” in response to the CMA’s obvious focus on consumer harm, said one senior competition lawyer.
Those commitments will be accompanied by evidence of alleged mathematical errors in the CMA’s original analysis and a deconstruction of the “gross upward pricing pressure index” or Guppi, which the supermarkets feel featured “statistically unreliable” inputs and an incongruously low threshold for harm.
“Historically the CMA has hypothecated 5-10 per cent price rises as the level at which problems emerge,” said one independent competition law expert. “Here it has dropped that to 1.5 per cent.” Unusually, the detailed Guppi modelling resulted in a higher number of local areas at risk of reduced competition than the initial analysis, which did not include discounters Aldi and Lidl as competitors.
“It [the Guppi] is an econometric black box that churns answers out. If the answers start to look counter-intuitive, at what point do you tweak the algorithm?” he added.
Guppi, which attempts to quantify companies’ incentives to raise prices, revolves around an analysis of margins and an estimate of “diversion”, or how likely a customer is to take their business elsewhere. The latter element was informed by a survey of shoppers which the companies said took in too few stores — 100 out of a total of more than 1,200 — and whose results were over-extrapolated to the entire estate.
The CMA’s initial verdict on the takeover, released in mid-February, was much more negative than most observers expected, resulting in a sharp fall in Sainsbury’s’ share price. The regulator will shortly publish the responses it has received to its initial decision and, having extended the final phase of the inquiry by eight weeks, deliver a final report by April 30.
If the verdict is still negative, the parties have the option of challenging it in court. “If they appeal, they will have to argue that the CMA has acted unreasonably,” the competition law expert said. “The regulator will of course argue that it has acted within its discretion.”
He said the prospect of a successful challenge was remote. “The CMA has sent a clear signal that they don’t want this deal to go through and I think that Sainsbury’s and Asda will struggle to overturn that.”
“At the heart of this are two different views. The CMA holds that the old Safeway decision is still the right one,” he added, referring to the 2005 takeover of Safeway by Wm Morrison. “The parties have tried to argue that the growth of discounters and online mean everything has changed since then.”
Sainsbury’s declined to comment. The CMA said that it used a wide range of evidence in phase two investigations and that all responses to its initial findings “will be carefully considered before we reach the final decision”.