Firstly, there won't be any reduction in choice because the proposal is that the merged operation will still operate separate Asda and Sainsbury's stores, aimed at different clientele. Asda stores are usually full of young mums with kids seeking burgers and baked beans, whereas Sainsbury's stores tend to attract an older clientele who're buying sun-dried tomatoes and pesto.
Secondly, Asda and Sainsbury's major challengers aren't each other but Lidl and Aldi. Combining the infrastructure behind Asda and Sainsbury's (such as their distribution network) will allow them to reduce their costs, thus giving them the chance to reduce their prices and attack Aldi and Lidl.
So Sainsbury's and Asda will win, as will their customers, but Aldi and Lidl will lose out.