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Taming the Retail Giants: The Impact of Mergers & Acquisitions on Competition

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About The Author

Dena Anee (Regular Writer)

Dena is a law graduate currently working as a Commercial Real Estate Paralegal within the Real Estate department of a top 20 international law firm. She is an aspiring solicitor with a keen interest in Commercial and Real Estate law. Outside of the law, Dena enjoys music, reading, and learning languages.

Competition is always a good thing. It forces us to do our best. A monopoly renders people complacent and satisfied with mediocrity.

Nancy Pearcy

Higher prices. Less choice. Reduced quality of products. Each of these had a profound influence on Britain’s Competition and Markets Authority’s (CMA) decision to block the £12bn merger between J Sainsbury plc (Sainsbury’s) and Asda Group Limited (Asda). It was taken in the teeth of a determined campaign by Mike Coupe, Sainsbury’s CEO, who promised to pass £1bn in price cuts to consumers, averaging price decreases of 10% on everyday items. This, however, was not enough to persuade the CMA that the merger should go ahead.

The merger, which had been under the skeptical eyes of the CMA since 2018, amalgamating the UK’s second and third largest supermarkets, would have created Britain's largest grocery, general merchandise and retail groups with combined revenues of circa £51 billion and a combined estimated market share of 30%—overhauling the market leader, Tesco, which holds a 27% market share. Merging the two supermarkets, which between them have 2,800 stores, “would reduce competition in supermarkets and online grocery shopping and at the companies' petrol stations”, argued Stuart McIntosh, chair of the CMA's inquiry group.


The increasing number of retail M&A deals in the UK has prompted calls for greater anti-trust regulatory scrutiny in order to guard against concentrations of corporate power.

As things stand, the UK’s retail landscape has changed significantly over the last decade. There has been a shift from offline to online shopping and the substantial growth of e-commerce has influenced the growing concentration of retail companies, particularly in the grocery sector, opting for Mergers and Acquisitions (M&A) as a form of corporate strategy to promote growth and achieve economies of scale. In the UK, more than 37 retail M&A deals have been announced between 2017-2018 alone. Aside from the integration process, the biggest challenge for the merging companies is to demonstrate to competition regulators that a proposed deal will not lead to anticompetitive effects. This is easier said than done.

The increasing number of recent M&A deals has prompted greater probes from the CMA, who are concerned about the anti-competitive implications on consumers and the potential of increasingly concentrated markets. To develop effective antitrust measures, competition regulators have established rigorous assessments to ensure that abuse of power is minimised by preventing corporations from achieving market domination. Indeed, the CMA’s most recent decision regarding Sainsbury’s and Asda reaffirms this stance. With great power comes great responsibility, and how this power is monitored will be of significant concern for the CMA.

The impact of mergers on competition 

The CMA seeks to critically analyse whether the outcome of the merger would lessen competition and result in higher prices for consumers. In the past, the CMA has blocked mergers as a result of the factors listed above. In 2013, the CMA – formerly existing as the Competition Commission – blocked a merger between Poole Hospital NHS Foundation Trust and Royal Bournemouth and Christchurch Hospitals NHS Foundation trust. This was due to expectations that the merger would have adversely affected the public interest by making it difficult for hospitals to improve quality of service for customers.

The CMA adopts the same framework to assess mergers in other markets. In the telecoms sector, the proposed merger between O2 and Three was blocked due to the concern that the deal would drive up prices for consumers and offer reduced choice. It is worth noting that “vertical mergers” – a deal between two companies at different stages of the production process – rarely face extensive anti-trust scrutiny. Incidentally, the vertical integration of Tesco PLC (Tesco) and Booker Group plc (Booker) was given the green light by the CMA since it decided that the deal “may not be expected to result in a substantial lessening of competition”. Two reasons led to this decision. First, Tesco and Booker operate in different markets; Tesco is a grocery retailer whereas Booker is a grocery wholesaler. Second, both retailers were not in direct competition in most of their activities.

By contrast, both Sainsbury’s and Asda supply competing products and operate in the same relevant market, making the nature of this deal a horizontal merger. Competition regulators have shown a greater appetite for blocking horizontal mergers. Unilateral effects – the loss of competition between two merging firms – occur in horizontal mergers: when two firms are no longer competing with each other, they can exercise a greater market power, thereby allowing the merged company to raise its own prices above competitive levels, thus harming consumers. It is of little surprise, therefore, that horizontal mergers invite greater scrutiny from the CMA.

How does the CMA assess a merger?

The CMA adopts a number of extensive assessments in order to gauge the anti-trust implications of a potential merger on the relevant market. In assessing how a proposed merger is likely to affect competition, the CMA adopts a subjective, hypothetical test – the SLC test – to determine whether a proposed merger will give rise to 'Substantial Lessening of Competition’ (SLC) within the relevant market. As discussed previously for Keep Calm Talk Law here, the CMA carries out this scrutinisation in two phases. Phase 1 will consider whether there is a real prospect that the merger will result in a SLC. If this is likely to arise, the investigation is then referred to a more in-depth, phase 2 investigation.

In its investigation of the Sainsbury’s/Asda merger, the CMA concluded that the proposed transaction raised competition concerns since the merger would result in the SLC at both a national and local level for consumers. A merger of this magnitude would have resulted in the combined company achieving near-monopoly power. The CMA is concerned that a company with near-monopoly power will have greater market concentration and could drive competitors out of the market, thereby leading to increased prices and reduced quality and choice of products for consumers. The CMA’s recent decision to block the merger reaffirms their commitment to promoting and safeguarding competition by preventing the abusive exercise of market power. Undoubtedly, the impact of this decision could mean that the CMA will prevent more of this type of merger cases in the future.

Under Pressure

The difficulty for competition authorities lies not only in the concept of how a merger is assessed for anti-competitive implications; but also in the increasing pressure from the public on competition authorities to exert aggressive merger control and to improve the framework in light of the “digital age”.  In response to this pressure, Lord Andrew Tyrie, Chair of the UK’s CMA, published his proposal to the UK Government in response to the challenges of the growth of the digital economy, and promised to “improve public confidence in markets.” In his proposal, Lord Tyrie outlined reforms which would refocus the aims of the CMA’s competition framework to one which better promotes and protects the interest of consumers and helps tackle “against the backdrop of an erosion of trust”. While this is good for consumers, for the merging parties it will mean stricter measures and the imposition of heftier penalties in the event of a breach of consumer law.

The CMA faces another, potentially more daunting, pressure: the threat of a “no-deal” Brexit. The current UK merger controls integrate with those of the European Commission (‘EC’). Under the “one-stop shop” regime, the UK can notify the EC to review mergers which meet the EU jurisdictional thresholds. In the event of a no-deal Brexit, the ‘one-stop shop’ rule will no longer apply; instead, UK and EU merger control will run in parallel. For merging firms who satisfy both the EU and UK merger control thresholds, merger investigations will be conducted, in parallel, by the CMA and the EC.  On the other hand, merger transactions which only affect UK markets will solely be carried out by the CMA and UK regulators, such as Ofcom and the Financial Conduct Authority.

For the CMA, this will mean a greater reliance on the regulations and prohibitions laid out in the Competition Act 1998. The UK courts will also oversee developments in UK competition law. None of this will be easy for the CMA: not only will the UK no longer be able to rely on the EC to carry out merger investigations, but there will likely be a reduction in the availability of appropriate resources, as well as an increased caseload. Following Brexit, the CMA estimates that it will see an increase of up to 50 merger investigation cases per year. The CMA, who are “determined to address the challenges seriously”, proposes to invest in personnel and recruit extra staff members to handle the increase in caseload. It will take time for the CMA to adjust to these challenges, and these adjustments will no doubt bring about significant changes for both UK consumers and businesses.

Conclusion: taming the retail giants

The CMA’s decision to block the Sainsbury’s and Asda merger establishes a precedent for future retail mergers. Following the decision, retail companies may have little appetite for further acquisitions. Furthermore, the CMA’s recent reforms highlight their efforts to deter anti-competitive effects in UK markets and prevent corporations from exercising excessive market power. The CMA will continue to adopt robust assessments to deliver aligned purposes for both UK consumers and the economy. On the other side of the coin, Brexit and its uncertainty will fuel challenges for Britain’s competition regulators. Meanwhile, for merging companies that assert a greater buyer power, they will continue to be faced with robust probes from competition regulators, which show no sign of letting up.

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Tagged: Brexit, Commercial Awareness, Commercial Law, Competition, Consumer Rights, Regulators, Retail

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