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Sainsbury’s shares hinge on Asda decision

Sainsbury’s lagged supermarket rivals over Christmas, raising stakes for the regulator’s decision on its Asda deal.

Solid food
A firm feel to Sainsbury’s grocery business over the quarter (+0.4%, grocery online +6%, convenience +3%) offsets softer sales across the group and is the main reason for a modest lift of the shares. After all, despite well aired competitive pressures and fluid shopping habits, it still appears Sainsbury’s core food business is running close to optimum. When intense scrutiny of the winter quarter abates, it makes sense that positive food sales throughout the year will again be reflected in Sainsbury’s stock, after it rose almost 10% last year compared to falls by close rivals.

Stakes raised for Asda buy
With food sales growth swinging wildly between 0.5% and 2% in preceding quarters though, grocery isn't exactly Sainsbury’s anchor. The fact is, when rivals pull out the stops, typically over Christmas, Sainsbury’s usually robust food business faces pressure; partly due to the group’s tricky mid-market position. Together with the underlying group sales let down in Q4, these conditions raise the stakes for the acquisition of Asda (the winner in Christmas sales growth stakes, according to Nielsen and Kantar). More to the point, the CMA's decision on potential market share remedies (store disposals) is even more critical now. The group has been fairly clear that the rationale of the deal will be undermined if the regulator requires store sales in the hundreds.

Suppliers in focus
Preliminary CMA thinking, released in the autumn— that it will consider discounters and Amazon—seemed to be in Sainsbury’s favour. The outcome of a broader review should prescribe fewer store disposals. Sainsbury’s goal of taking more share via scale would then be in sight. Still, the supplier piece is less predictable after the CMA signalled that buying power inequalities would also be a priority. Provisional findings are likely within weeks, ahead of the 5th March statutory deadline.

CMA holds retail cards
After fair but tortuous progress by supermarkets in late-2018—also likely to be reflected in Tesco figures tomorrow—investors will zero in on operators with the best perceived defences for the year ahead. Shares in all Big 3 supermarkets sagged sharply in 2018. Sainsbury’s was actually 41% higher in August. Consequently, the CMA’s decisions will rock the sector further and decide whether Sainsbury’s shares unwind even more.

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