The bolt from the blue that was this week’s revelation of Sainsbury’s proposed merger with Asda eclipsed even the Tesco-Booker tieup as the grocery deal of the decade. But while shoppers may not immediately notice any change, throughout the supply chain there is considerable uncertainty about what it all might mean.
It’s safe to say not many people saw last weekend’s shock announcement coming. “Everybody is a little surprised, but there’s been talk about consolidation in the market place for a while, and it’s a sign of the times, where bigger is seen as better,” one fresh produce supplier told FPJ.
Indeed, against the backdrop of an unending supermarket price war, in which even premium stores such as Waitrose feel it vital to have an Essential range that competes with more price-centric rivals, remaining competitive has to be at the heart of the move. Continuing pressure on bricks-and-mortal retail in the face of growing online sales is also a factor.
Much has been said about what it all means for consumers, but what about suppliers? Will it be an opportunity to grow business, or an overriding fear of losing contracts? And who are the likely winners and losers?
“It will be interesting to see how they trade with two faces,” said one. “It will certainly put pressure on suppliers. Everybody is trying to take costs out and obviously the retailers are trying to lower costs and remain competitive.”
One can certainly imagine that Sainsbury’s suppliers, already weary from the supermarket’s lengthy supply chain review that saw a number of businesses lose tens of millions of pounds in contracts last year, while others gained, won’t welcome the prospect of further scrutiny. Clearly, there will be a temptation of the combined group to rationalise its supply base, sourcing more from fewer suppliers across the group.
“The question is where does [Asda’s direct sourcing arm] IPL fit into all of this?” the managing director of a major supermarket supplier told FPJ. “One imagines Sainsbury’s will now go even further down the direct sourcing route. From a supplier point of view I’d be very concerned if I was an importer, because of IPL’s model. For direct grower suppliers, I don’t think there’s so much to worry about.”
Sainsbury’s supplier review was about sourcing as much as 75 per cent of each product group directly from growers, with the remainder managed by a single importer. That suggests the procurement strategies of the two retailers may be more aligned than at first glance.
There is particular concern that a group with a third share of the market could use its power to force down purchase prices, with smaller suppliers in particular unable to stand their ground. NFU president Minette Batters has already said she plans to meet with the two companies to gain assurances about their new supply chain approach. “We will be requesting a meeting with Sainsbury’s and Asda to ensure that the commitment of the new business to British sourcing will not be affected,” she said. “First and foremost the NFU will be seeking to understand what potential impact a merger would have on our members – both those farmers who are directly part of these supply chains and those who could be affected by wider connotations.”
Sainsbury’s – which is very much the public face of the merger – has played down supplier concerns, with a spokeswoman telling the BBC they would actually benefit from the deal. “At this stage, we are still in the early phases of our plans but we believe this is a great opportunity for suppliers as they will be able to make their supply chains more streamlined, to develop differentiated product ranges and to grow their businesses as we grow ours.
“We are also actively investing in small suppliers,” the spokeswoman added. “We are recruiting a team that is dedicated to working with smaller and distinctive suppliers to help them bring new products to market and to handhold them through this process.”
And the merger could even bolster belief among the supply base about the future, one analyst reckons. Freddie Lait, CIO and founder of Latitude Investment Management and a shareholder in Tesco, said he believed an increase in spare cash for the merger might actually boost supplier confidence. “Consolidation is a common feature of mature industries which are undergoing disruptive threats; in food retail’s case this includes online shopping and discount retailers. More concentrated market structures tend to derive greater aggregate profit pools so, in the medium term, we expect this to be a supply side tailwind for the sector.”
But one thing is for sure – suppliers of both stores will not be sleeping comfortably until there is clarity.
Q&A: Sainsbury's-Asda explained
What’s been announced?
Sainsbury’s and Walmart-owned Asda confirmed this week that they are in advanced talks over creating the UK’s biggest supermarket group, worth up to £15 billion. The fusion of the UK’s second and third largest supermarkets would result in a group with 2,800 stores and combined revenues of £51bn, leapfrogging Tesco in terms of market share.
Why was this decision reached?
With the rise of the discounters, as well as the emergence of Amazon and other specialist online grocery services, the big-four supermarkets have found their share squeezed. With large outlets, an ultra-competitive marketplace and lack of true differentiation, retailers have had to find new ways to attract shoppers. Sainsbury’s already signalled its intent to reshape the shopping experience with its purchase of Argos, making stores more of a ‘destination’ for consumers.
Will there be a new name and fascia?
No. The two sides have insisted they will retain their existing brand identity, though of course that could change later down the line after the merger beds in.
Who will be calling the shots?
Sainsbury’s chairman David Tyler will chair the new group and it will be led by Sainsbury’s chief executive Mike Coupe and chief financial officer Kevin O’Byrne. Asda will continue to be run from Leeds with its own chief executive. Again, the supermarkets have insisted there will not be job cuts, but one imagines there could ultimately be seen to be duplication of roles, such as at category management level.
What does it mean for the supermarket price war?
Coupe has insisted that far from meaning higher prices for consumers, the new group would look to lower prices on many everyday products by as much as 10 per cent. The deal is expected to deliver cost savings of around £500m per year from improved buying power and operational cost efficiencies.
Will this rattle the discounters?
Aldi and Lidl are unlikely to be too fazed by the news, and may even see it as an opportunity to accelerate their own growth ambitions if competition authorities insist Sainsbury’s and Asda sell stores before greenlighting the merger.
