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Admit it, Britain. You like German grocers

Aldi, the German supermarket chain, stocks fewer product lines than its British rivals. The competition watchdog is now analysing how much competition it stirs up with British chains. PHOTO: REUTERS


AT AN Aldi grocery store overlooking the rugged Kent coast in south-east England, customers are loading up their shopping carts. It's the same situation at a Lidl outpost in scenic Oban, Scotland.

The British love affair with the German no-frills supermarkets started about a decade ago, and shows no signs of abating. And that will be crucial in determining whether the competition authorities approve J. Sainsbury's £7.3 billion (S$12.7 billion) takeover of Walmart Inc's Asda - and if they do, how punitive forced store closures will be.

The UK's Competition and Markets Authority (CMA) will give its provisional findings on the deal early next year. This will be the first tie-up between two big British grocers since the German discounters became a significant force in the market.

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The CMA's view in the past has been that medium-sized stores of the type they operate don't provide a decent alternative to big supermarkets for a significant number of shoppers, and so don't amount to a competitive threat. But a look at many parts of the UK suggests this assumption is no longer valid. The stores are busy, and the parking lots are packed.

Any change of heart by the regulator should, on the face of it, make it easier for Sainsbury and Asda to get the go-ahead, as the Germans' presence could counter the impact of the loss of one of Britain's "Big-Four" supermarkets. Even if the deal ultimately falls apart, it's a good thing that the challenge posed by the discounters is being recognised.

UK grocers have certainly been feeling it for some time. Several years ago, their profits plunged as they slashed prices to compete. They also reduced the size of some stores and simplified their ranges.

But there is one big caveat in considering the competitive reach of the discounters: the Germans have their limits.

Aldi sells about 1,800 lines, and Lidl, 2,000. That compares with 30,000 to 40,000 at a typical supermarket. They also primarily sell own-label products; only about 10 per cent of Lidl's ranges are made up of big brands from the likes of Unilever and Nestle. The proportion of household names is even smaller at Aldi, at about 5 per cent.

For regulators, that's a dilemma. In one part of the market - where shoppers are happy to buy own-label products - the merger wouldn't diminish competition much. But in another - where customers want household names - there is potentially a huge impact. And given Wm Morrison Supermarket's much-smaller position, a duopoly between Sainsbury and Tesco over the pricing of Heinz baked beans and Marmite could result.

One way the CMA could address this is by assessing a so-called weighted share of shops, an approach that Sainsbury and Asda are urging and that officials used to evaluate Tesco's takeover of wholesaler Booker. Under this methodology, Aldi and Lidl would be assigned a ranking based on the size of their competitive threat. This is a more complex assessment than the traditional approach of counting how many Asda and Sainsbury stores there are in a particular area and using the findings to determine store closures.

A high score of 1 would amount to classifying the discounters as full competitors. A ranking of zero would mean they are not a threat at all. Though both extremes are unreasonable, it's easy to argue that Aldi and Lidl are significant rivals. Adopting this view should make the regulator more likely to approve the deal, and the potential store closures less punishing.

It's not clear the CMA will decide to use this test, or appreciate the strength of the value supermarkets. And even if it did, this wouldn't solve all the merger's problems. There may still be areas where there are too many overlapping stores. Officials said in September that the deal could create a substantial lessening of competition in 463 localities.  Their analysis will also have to consider the impact on suppliers, and concentration in other areas, such as Northern Ireland, the fuel market, online grocery shopping and non-food sectors including toys.

There are plenty of reasons why this merger inquiry might not have a picture-postcard ending.

But it should at least establish the regulator's views on the competitive threat posed by the German discounters, something that could set the tone for future deals in the British grocery market. BLOOMBERG