Outlook: Supermarket merger would cost consumers

The arrival of New Labour in government and Margaret Beckett at the Department of Trade and Industry (or Mrs Blockit as she is coming to be known), seems to have done little to dampen industrial and commercial appetite for the ever more ambitious merger.

Rather the reverse; that Asda and Safeway, numbers three and four in the supermarket league table, could even contemplate such an apparently anti-competitive marriage shows how great the pressure for these things has become.

Even the previous government would have thought long and hard before waving this one through; what on earth made David Webster, chairman of Safeway and the originator of this grand plan, think he could get it past the present incumbents? As it turned out, he never got the chance. The talks leaked and as a consequence the deal has been abandoned. All the same, it is still worth examining the arguments. The City is urging the two parties back to the negotiating table, so it may still happen.

Businessmen always see the world through rose-coloured spectacles and from Mr Webster's point of view, the case for this merger is so obvious and overwhelming that even the most diehard of competition bores couldn't possibly resist it. And indeed there is a level on which the argument does have some merit. Planning and environmental restrictions are making it progressively more difficult for anyone to build out-of-town supermarkets.

Asda and Safeway can continue to grow by improving their sales per square foot, which is much lower than the two market leaders, but they are restrained in their ability to expand much further physically. There is therefore little possibility of either of them individually ever enjoying the same economies of scale as Tesco and Sainsbury.

If they were allowed to merge, however, they would be up on a level with the two goliaths of the trade and able to compete on an equal footing. Battle proper would commence, prices would tumble by anything up to 5 per cent, inflation would be lower, interest rates would fall, Britain would find it that much easier to join monetary union, Tony Blair would get re-elected ... you get the picture.

But actually it wouldn't be like that. For evidence of this, just look to the City; why would the City want to back a merger, you have to ask yourself, that would lead to a bloody price war and as a consequence damage its rather larger investment in Sainsbury and Tesco. It is because the reality is that, after an initial skirmish for the sake of appearances, the present near dominance of the two would become the absolute dominance of the three. Consumers and suppliers, many of whom have a choice of Asda and Safeway if they don't fancy Sainsbury and Tesco, would get even more squeezed than they are at present. In some catchment areas, where Asda and Safeway are the only supermarkets, competition would vanish entirely.

As it is, Mrs Beckett isn't going to get the chance to say no, or not for the time being, anyway. Whoever leaked the story has scuppered the whole thing as effectively as if Mrs Beckett had said Blockit. These things aren't always deliberate. Stories like this can come from the strangest of sources. But given the spin being put on it over the weekend by Archie Norman's Asda, it is obvious which of the two parties was beginning to get cold feet.

Asda tried to make out that this was a case of the weaker Safeway just begging to be taken over. This was never the case, claims Safeway, and there's reason to believe it speaks the truth. If either party had been forced to pay a bid premium for the other, there wouldn't have been much left in the deal either for its own shareholders or customers. The get- together would really only work as a genuine, no-premium merger.

This rather suggests Mr Norman has made up his mind that he simply doesn't want to do it. Though he now spends most of his time trying to revive the fortunes of the Tory Party and takes a back seat at Asda, nobody could really blame him for thinking in this way. When he first joined the company, Asda was a basket case that Safeway could have picked up for next to nothing. Now it is bigger, both in terms of market value and sales. If ever there were an example of how determination and innovation can work, even in a market place dominated by giants, Asda is it.

As for Safeway, there is no reason to believe it too should not continue to prosper as an independent company. The future lies not in consolidating domestic mergers, but in cross-border alliances and tie-ups. Once the euro starts ringing through our checkout tills, and Europe becomes one giant, single food retailing market, then perhaps it would be right for ministers to consider some further consolidation in the industry. But that moment has not yet arrived.