Admit It, Britain. You Love Your German Grocers

At an grocery store overlooking the rugged Kent coast in southeast England, customers are loading up their shopping carts. It's the same situation at a Lidl outpost in the scenic Oban, Scotland.

No frills supermarkets started with a decade ago, and shows no signs of abating. J Sainsbury Plc's 7.3 billion pound ($ 9.3 billion) takeover of Walmart Inc.'s Asda – and if they do, as punitive forced store closures will be.

The U.K.'s Competition and Markets Authority will provide its provisional findings on the deal early next year. British grocers since the German discounters became a significant force in the market.

The CMAs have been set up to be a decent amount to a competitive threat. But a look at many parts of the U.K. suggests this assumption is no longer valid. The stores are busy, and the parking lots are packed.

"A change of heart" should be on the face of it, make it easier for Sainsbury and Asda to get the go-ahead, as the Germans' presence could counter the impact of the loss of one of Britain's "big-four" supermarkets. It is a good thing that the challenge posed by the discounters is being recognized.

U.K. grocers have certainly been feeling it for some time. Several years ago, they saw their profits as they slashed prices to compete. They also reduced the size of some stores, and simplified their ranges.

But there is one big caveat in considering the competitive reach of the discounters: the Germans have their limits.

Aldi sells about 1,800 lines, with Lidl offering 2,000. That compares with 30,000 to 40,000 at a typical supermarket. 10% of Lidl's range of products from the likes of Unilever and Nestle SA. The proportion of household names is even smaller at Aldi, at about 5 percent.

For regulators, that's a dilemma. In one part of the market – where they are happy to buy their own products – the merger would not decrease competition much. But in another – where customers want household names – there is potentially a huge impact. And given Wm Morrison Supermarket Plc's much-smaller position, to duopoly between Sainsbury and Tesco Plc over the price of Heinz baked beans and Marmite could result.

One way the CMA could be so called weighted share of shops, an approach that Sainsbury and Asda are urgent and that used to evaluate Tesco Plc's takeover of wholesaler Booker. Under this methodology, Aldi and Lidl would be assigned to a ranking based on the size of their competitive threat. Asda and Sainsbury stores are based on the traditional approach of many companies.

A high score of 1 would amount to classifying the discounters as full competitors. Are not a threat at all. Both are extremes are unreasonable, it's easy to argue that Aldi and Lidl are significant rivals. More likely to approve the deal, and the potential store.

CMA will decide to use this test, or appreciate the strength of the value supermarkets. It would not solve all the merger's problems. Too many overlapping stores. Officials said in September that they could create a substantial lessening of competition in 463 localities.

Online shopping and non-food sectors including toys.

There are plenty of reasons why this merger can not be a picture-postcard ending.

But it should not be the least expensive.

To contact the author of this story: Andrea Felsted at afelsted@bloomberg.net

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

© 2018 Bloomberg L.P.

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