The £13.3bn merger between Sainsbury and Asda would create a UK retail monster 42 percent owned by US retail mega-monster Walmart. Greater efficiency leading to lower prices for customers is being touted as the logic for the deal, but even if cost-cutting does benefit customers and not just shareholders is this really an adequate measure of the public good?
As a former City corporate stockbroker, I have seen my fair share of merger and takeover proposals being touted by ambitious M&A bankers seeking their next big payday. Some have a sound wealth creating logic, for example by giving a successful company access to new markets faster than organic growth would allow, or by expanding the product ranges available to customers through existing sales channels. Sometimes large corporations can give themselves an innovation injection by acquiring a smaller upstart to the benefit of all.
This proposed grocer-to-homewares combination is none of these. It is a classic defensive merger. With shrinking market share, and therefore threatened shareholder returns, in the face of vigorous competition from newer market entrants Lidl and Aldi the incumbents huddle together for safety.
But let’s unpack the implications of the deal, which would place 31.4 percent of the UK grocery market in the control of a single company based in London.
Economies of scale or the abuse of market power?
The ability to negotiate lower prices from suppliers will be one of the drivers of this merger. Often described in business news-speak as ‘economies of scale’, this can seem like the sort of efficiency gain that Britain’s low productivity economy desperately needs.
However, it is nothing to do with productivity and simply represents an increase in the imbalance of power in the market between the already tiny number of giant retailers and huge numbers of much smaller suppliers. This is not wealth creation, it is bullying.
Adam Smith, who first described the power of markets to drive public benefit through private profit, would be horrified at such a concentration of power undermining the mutual and reciprocal benefits of market exchange.
Squeezing every drop of profit out of the food production supply chain transfers wealth from rural regions to urban consumers and wealthy shareholders, increasingly not even shareholders based in the UK.
To move from the abstract to the human, the relentless unilateral imposition of price cutting by grocers over UK food producers over decades has driven up business failures, harmed rural livelihoods and is a factor in causing worsening mental health among farmers, particularly in dairy farming.
The cost of cheap food and the efficiency illusion
This merger is about much more than groceries, but food production is an issue of vital public interest, and this is where we need to focus particular attention.
Perhaps the best thing about markets is the ability to capture a massive amount of information into one simple metric – the market price. This beats the ability of any central planner to organise production and exchange. That is why we are committed to a market economy.
But perhaps the worst thing about markets is the massive amount of information that is ignored. In particular, the hidden environmental and social costs of different products make a mockery of the idea that prices reflect the efficient allocation of resources to meet consumers’ desires. (I am not even going to delve into the realities of behavioural science that belie the idea of the 'rational consumer' in the first place).
So, if we strip out a few distribution centres and increase food miles and fuel consumption have we increased efficiency, or hastened climate change?
If we force food producers to lower costs by scaling up mono-crop production using even more pesticides and fertilisers have we increased efficiency or dealt another blow to soil fertility and biodiversity?
If we lengthen supply chains, requiring more packaging to enable food to survive the industrial distribution system, are we increasing efficiency or clogging up nature with more waste?
Consumers are people too
To return to the question of competition policy, the approach in the UK is to focus entirely on consumer benefit. In other words, anything goes if it keeps feeding the machine of consumerism with cheap stuff.
This one dimensional way of understanding markets is woefully inadequate. There are many stakeholders in companies and markets. Our legal system recognises them in the Companies Act, which explicitly states that the interests of employees, suppliers, the community and the environment must be taken into consideration in corporate decisions.
So how can competition policy ignore them?
It is not just that we risk benefitting one section of society by exploiting others. Focusing purely on low prices for consumers also ignores the complexity of the economic system.
One of the insights from our Citizens’ Economic Council was the reaction of participants to the argument that industrialised, polluting, chemical, wasteful food production systems were necessary to give them cheap food. Instead, they argued that they wanted high quality, nutritious, environmentally safe food that gave a fair and decent living to everyone involved in producing it.
The reason, they argued, why people can’t afford high quality food is because wages are too low, and other costs of living, especially rent, are too high. In other words, cheap food is not the answer to strained household budgets, certainly not at the cost of exploiting food producers, underpaying workers and damaging the environment.
We must overhaul competition policy
There has been ever increasing focus of late on the power of technology giants. Why does it seem so difficult to come up with an appropriate response to the extraordinary concentration of wealth and power that has been gathered into so few hands at Apple, Facebook, Amazon and Google?
Because of the same simple conceptual flaw at the heart of competition policy. These tech companies have delivered wildly popular and useful products and services into the hands of consumers, often without charge. At this point, our existing economic policy simply walks on – nothing to see here.
But this reductive view of public benefit ignores the fact that consumers are also workers, who live in communities and who wish for an unspoiled and unpolluted national (and global) environment.
It is not certain that the Sainsbury/Asda merger would actually lead to lower prices, and many would argue that the reduction in competition might have the opposite effect. But even if it did lower prices, this would not necessarily serve the public interest.
It is time to reconfigure competition policy around the concept of balancing stakeholder interests. This might mean that is some cases it is more important to protect good livelihoods or environmental quality over cheap goods.
The goal of the Competition and Markets Authority is to “promote competition for the benefit of consumers.”
Instead it should be tasked with the goal to “promote markets that serve the public interest”, with a definition of public interest that includes the same stakeholders that are enshrined in the Companies Act.
Economists might think the world is divided into consumers, workers and shareholders, but in the end there are only people.