Walmart’s British Supermarket in Merger Talks

Posted April 28, 2018 3:37 p.m. EDT

Two of Britain’s grocers are in talks to merge, potentially creating the country’s biggest supermarket operator amid continued upheaval in the retail industry.

In a statement Saturday, the chain J Sainsbury confirmed news reports about its talks to combine with Walmart’s Asda supermarket business in Britain, adding that it planned to make an announcement Monday morning. It is unclear how much of a stake Walmart would retain in a potential transaction.

The move reflects how retailers have been forced to cast about for ways to deal with a rapidly changing retail industry. In Britain alone, chains like the electronics store Maplin and the department store BHS have filed for bankruptcy in recent years.

Amazon remains a huge threat, through both its online operations and its growing brick-and-mortar presence, with Whole Foods Market. And in the grocery sector, low-cost chains like Aldi and Lidl have lured British customers away from traditional competitors like Sainsbury, Tesco, Asda and Morrisons.

Walmart bought Asda in 1999 for 6.7 billion pounds — then worth about $10.8 billion — as part of an effort to expand beyond the United States. Since then, however, Walmart has pulled back from that international growth after struggling to crack markets like Germany. (One exception: It is nearing a deal to buy control of Flipkart, India’s biggest e-commerce company, in what would be a multibillion-dollar transaction.)

Asda has struggled financially. In 2016, the last year for which figures are available, its sales fell 3 percent from the same time a year ago, to 21.7 billion pounds. Profit fell 17 percent during that period, to 656 million pounds.

Putting Asda together with Sainsbury, one of Britain’s biggest grocery chains, could help the combined business negotiate lower prices from suppliers, one of the primary goals of many retail mergers.

Sainsbury has already turned to deal making in recent years to address its weaknesses. Nearly two years ago, it bought the Home Retail Group, which owned stores like the Argos home goods chain, for about 1.3 billion pounds to diversify its offerings.

That acquisition helped push up sales, with its 2017 revenue rising 11 percent, to 26.2 billion pounds. But profits for the period fell nearly 20 percent, to 377 million pounds.

Sainsbury’s bigger rival, Tesco, has also sought to expand through acquisitions. This year it completed a nearly 4 billion pound takeover of the Booker Group, a food wholesaler.

The biggest hurdle to a merger could be Britain’s competition regulator, which may be wary of allowing two of the country’s biggest grocery chains to combine.

The companies may argue that they serve different consumers: Asda caters more to cost-conscious customers, while Sainsbury aims for wealthier ones. Their stores are also largely located in different parts of Britain, with Asda more prevalent in the north and Sainsbury in the south.