J Sainsbury PLC (LON:SBRY) had a shocking Christmas but shares are higher on hopes its proposed merger with Asda gets the green light by the competition watchdog.
The supermarket chain reported a 1.1% drop in like-for-like retail sales for the 15 weeks to January 5, reflecting poor performance in general merchandise and clothing.
READ: Sainsbury's sales fall over key Christmas trading period amid tough competition
Investors are now turning their attention to whether the UK’s Competition and Markets Authority clears Sainsbury’s £7.3bn deal to buy Asda from Walmart Inc (NYSE:WMT).
Sainsbury's confident CMA will approve Asda merger
Following the trading update, Sainsbury’s boss Mike Coupe told reporters that it is confident the regulator would approve the merger.
“The big question now is what will happen to Sainsbury’s if it doesn’t merge with Asda,” said Russ Mould, investment director at AJ Bell.
“Sales momentum is poor and the business still seems to be having problems with empty shelves according to posts from its customers on social media.”
The latest figures from Sainsbury’s confirmed industry data on Tuesday that showed the company was the worst performer out of the UK’s big four supermarkets, which also includes Tesco PLC (LON:TSCO), Asda and WM Morrison Supermarkets PLC (LON:MRW).
READ: Sainsbury's worst performer of big four supermarkets over Christmas, industry data shows
Kantar Worldpanel said sales at Sainsbury’s fell 0.4% in the 12 weeks to December 30 while rival market researcher Nielsen said the supermarket’s sales dropped 0.6% in the 12 weeks to December 29.
In contrast, Asda came out on top in both reports with sales up 0.7% in Kantar’s data and sales up 0.8% in Nielsen’s figures.
Sainsbury’s still had a slightly bigger share of the grocery market over the key festive period.
According to Kantar, Sainsbury’s market share was 16.2% compared to Asda’s 15.2%. Nielsen said Sainsbury’s had a 15.1% share of the market and Asda had 14.0%.
'Hard to see meaningful growth' at Sainsbury’s if merger rejected, says analyst
But based on the recent sales performance of the two supermarkets, investors may question whether Sainsbury’s needs Asda more than Asda needs Sainsbury’s.
Sainsbury’s has said it expects savings and synergies from the proposed merger to boost profits by at least £500mln so there seems to be a lot hinging on the deal.
George Salmon, equity analyst at Hargreaves Lansdown, said it is "hard to see meaningful growth" in sales and profits if the merger doesn’t go ahead.
The CMA referred the tie-up to “phase two” investigation in September amid concerns that it could reduce competition in the sector.
Initial findings from the CMA found a “realistic prospect of a significant lessening of competition” in 463 places in the UK where local supermarkets’ catchment areas overlapped.
The companies may be forced to offload hundreds of stores to satisfy the CMA before it receives approval.
The merged company would have almost 3,000 stores and annual sales of more than £50bn. The deal will create the largest supermarket group by market share, overtaking Tesco PLC (LON:TSCO).
CMA's view on Aldi and Lidl 'crucial'
“At present (Sainsbury’s) is putting all its eggs in one basket with the planned Asda merger, but if that fails where does it leave the business?,” said Neil Wilson, chief market analyst at Markets.com.
He added: “It still seems, on balance, likely that the CMA will reject the merger. However, with the rise of discounters one has to ask if the big four is already an anachronism. How the CMA views these discounters within the market competition framework is crucial.”
German discounters Aldi and Lidl have been chipping away at the market share of the UK’s big four supermarkets.
The rise of the discounters prompted a price war between the biggest chains and forced them to change tactics to address sluggish sales with Morrisons and Tesco expanding into wholesale supply and Sainsbury’s planning to join forces with Asda.
Last month, Sainsbury’s and Asda was granted more time to respond to the CMA’s probe at a competition tribunal hearing in London.
The new deadline was said to be around December 21, earlier than the supermarkets’ January 4 request.
The CMA is expected to deliver its verdict next month.