Asda-Sainsbury’s ruling likely means a delayed U.K. exit for Walmart

A plan to merge Walmart-owned Asda with Sainsbury’s, partially motivated by Walmart’s desire to focus on higher growth markets in China, India and Mexico, has been rejected by United Kingdom regulators, with retail insiders now wondering what’s next for Asda.

The United Kingdom is considered a mature market. There is little growth opportunity in the competitive landscape of discounters that have carved up market share resulting in diminishing returns for Asda which is considered the No. 3 grocery retailer in the U.K. behind Tesco (1) and Sainsbury’s (2). Aldi and Lidl continue to exert pressure on the grocery retailers in the U.K. and that is not soon expected to subside, according to retail analyst Walter Loeb.

He said Walmart’s options are limited given another merger is unlikely after the recent ruling by the Completion and Market Authority that blocked the Asda-Sainsbury’s deal. Loeb said Walmart could spin off Asda as a free-standing company and take it public, much like Walmex, the company’s subsidiary in Mexico and Central America. But that doesn’t help Walmart Asda improve market share where it has struggled to hold on to third place from the likes of Aldi and Lidl.

A similar position existed for Walmart in Brazil as it could not break out of third place in a country where growth was muted amid corruption and economic turmoil on a national scale. Walmart sold its Brazilian interests to a private equity firm and took a loss on the deal. That option could also work with Asda, according to Loeb.

“The bottom line is that Walmart is likely to be out of this business in the U.K. I always regarded ASDA as a well-run company with quality food and imaginative general merchandise offerings. Some labels, like the George brand, even found a home in Walmart stores and added to the luster,” Loeb said.

Walmart CEO Doug McMillon has said the retail giant needs to right-size its global footprint and that includes exits from some countries while pouring more money in growing countries like India. Asda has been a deep talent well for Walmart U.S. as several of its top executives made the journey across the pond from Asda to Walmart U.S. in recent years to stand up the retailer’s online grocery business.

Judith McKenna, CEO of Walmart International, and former chief operations officer at Walmart U.S., came from Asda. Tom Ward, senior vice president of digital operations, which includes online grocery, also came from Asda, as did Mark Ibbotson, executive vice president of Walmart Realty and Central Operations. Each of the executives worked on Walmart grocery pickup using the expertise they learned from Asda which has been delivering groceries in the U.K. for 20 years. David Cheesewright, the former Walmart International CEO, also come to Walmart through Asda. Cheesewright is now working as a consultant to Walmart on artificial intelligence, machine learning and augmented reality applications that Walmart can scale.

Execs with Sainsbury’s and Asda expressed disappointment in the blocked merger but will not seek judicial review of the decision. Sainsbury’s CEO Mike Coupe said the reason the companies pursued the merger was to lower prices for customers and the CMA’s conclusion the merger would raise prices ignores the competitive nature of the nation’s grocery market.

“The CMA is effectively taking £1 billion out of customers’ pockets. Sainsbury’s is a great business and I am confident in our strategy. We are focused on offering our customers great quality, value and service and making shopping with us as convenient as possible,” Coupe said.

IGD estimates the food and grocery market in the United Kingdom will grow by 14.6% over the next five years. They estimate the value by 2023 of the U.K. grocery market to be £218.5 billion or $285 billion U.S. dollars. IGD reports the discount retailers are expected to make the biggest contribution to cash growth rising 37% to $41.092 billion. The growth will be driven by rapid expansion supported by upgrades to existing stores.

“Food discounters are benefiting from targeted investment in key categories such as fresh produce, meat and bakery, along with improvements to the in-store environment and facilities, making stores much more comparable to supermarkets,” said Simon Wainwright, director of insights at IGD.

Walmart reports earnings on May 16 and analysts expect a brief update on Asda. Insiders say Walmart is not under the gun to unload Asda at any cost, giving the time to explore possibilities and continue to run the business.