Analysis: Sainsda or Asburys? Is it a match made in Holborn?

By Michael Barker

The shock announcement of Sainsbury’s proposed merger with Asda has been billed as good news for consumers, but will it be so well received in the supply chain?

If the grocery industry thought it had witnessed the mega-deal of the decade with the Tesco-Booker tieup, that has been dwarfed by the news that Britain’s second and third-largest retailers, Sainsbury’s and Asda, plan to merge.

Creating a retail juggernaut that will supersede even Tesco’s long-held market supremacy, the two supermarkets revealed they are in advanced talks over a £15 billion merger that will see 2,800 stores and revenues of in excess of £50bn under the unified banner. 

In a clear attempt to appease competition authorities, Sainsbury’s chief executive Mike Coupe – who will also run the combined business – announced a plan to cut prices on everyday essentials by as much as 10 per cent thanks to a projected £500m of cost savings. All well and good for consumers, but what does it all mean for suppliers who now face a period of uncertainty wondering whether they will win or lose business?

Nicola Mallard, a research analyst at Investec with a specialism in the food and FMCG sectors, tells Poultry Business that while the concept of two major food retailers merging is not new, the sheer scale of it offers a fresh dynamic to the sector. “When you put their market shares together, you have two retailers [in Sainsbury’s-Asda and Tesco]with 60% of the market,” she points out. “That’s quite unusual across Europe and we’ve only seen that kind of scale in Australia, which is dominated by two retailers.”

Mallard believes poultry suppliers’ view of the deal will depend on which of the two supermarkets they are already selling to, and whether they are in the own-label or branded segment. “If you are selling branded product you’re already likely to be in both stores, the product would be identical and you can immediately spot the difference in price,” she says. “You therefore have nothing to gain, as there would be no volume increase and from a pure price comparison perspective you’re likely to be getting the lower price once the two merge.”

In the private label sector, by contrast, products are not identical, and may meet different needs in the value spectrum. There could also be opportunities for producers who are only supplying one of the retailers to begin a relationship with the other, she adds.

Some onlookers fear that suppliers could be the ones bearing the brunt of Coupe’s £500m cost saving, particularly given he stated that £350m of that will come from leveraging the buying power of the combined business. “With rising production and import costs, suppliers are being squeezed from both ends and it will be imperative they ensure their industrial processes are streamlined and operating at full efficiency,” says David Gurr, global channel manager at InfinityQS.

There certainly seems to be a palpable sense of unease in the supply chain, and producers will doubtless be seeking urgent meetings with their customers to establish the ramifications of the deal. One supplier to the major supermarkets, who did not want to be named, says everyone is watching closely to see how the combined entity manages to trade with two faces. “It will certainly put pressure on suppliers,” he agrees. “Everybody is trying to take costs out and obviously the retailers are trying to lower costs and remain competitive.”

NFU poultry board chairman Tom Wornham says the most important thing is that the supermarkets continue to support British poultry farmers and back the Red Tractor, and NFU president Minette Batters has also stated that the union is seeking assurances from the two stores that both direct-supplying farmers and those in the wider industry are unaffected. “If they do back British suppliers and farmers are profitable, then farmers will be happy,” Wornham says. “It’s very important for supermarkets to support British so consumers feel confident in British product. It looks like Asda will become more like Sainsbury’s rather than the other way around, so if customers believe that Sainsbury’s has good quality then it’s a win-win.”

Wornham believes that whatever incarnation the merger takes on, they will still want domestic poultry from quality farms. “I’ve spoken to several supermarkets in the past week and they are very concerned about supporting UK agriculture, and they want continuity of supply,” he says. However he does acknowledge that major supermarket mergers must cause more sleepless nights at the big poultry suppliers such as 2 Sisters and Moy Park than at smaller farms who can be more nimble if they need to switch up their customer base.

‘Great opportunity for suppliers’

Sainsbury’s itself, which has been bearing the brunt of the media work since the announcement, has insisted that suppliers do not need to fear the merger, and has also moved to allay fears that smaller producers could be the ones to suffer. “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,” a spokeswoman told the BBC. “We are also actively investing in small suppliers. We are recruiting a team that is dedicated to help them bring new products to market and to handhold them through this process.”

A further issue of potential upheaval surrounds what will happen to buyers and whether Sainsbury’s and Asda will look to consolidate buying functions as a way towards the projected cost savings. While the two stores were keen to point out the synergies in their businesses at the unveiling of the deal, Mallard says suppliers don’t all see it that way and it could come down to how much differentiation of the two buying departments Sainsbury’s and Asda want to keep going forward.  

And of course there’s also the question of what the merger means for the wider grocery market. At a time when farmers have enough to deal with thanks to the numerous uncertainties of Brexit, the last thing they could do with is a new phase of the supermarket price war, particular at a time when most analysts say food prices need to rise. The discounters, having enjoyed years of strong growth as they moved from relative obscurity to a more than 12 per cent combined market share, won’t appreciate any pretenders to their claims to be cheapest. However, sources close to the discounters have insisted they are ready to undercut any moves by Sainsbury’s and Asda, and both have made public statements to that effect. A spokesman for Aldi said: “We will never be beaten on price and are absolutely committed to maintaining the significant price gap between Aldi and our competitors.” And Lidl responded that “our customers can be assured that we cannot be beaten on price,” pointing to its buying power and straightforward operating model.

Sainsbury’s has been undergoing an extensive supplier review across its wider fresh food business over the past year, looking at opportunities for more direct sourcing from farmers, while Asda already sources large amounts of fresh food directly via its buying arm IPL. That might not be a model that works for poultry, but there is little doubt that there will be further scrutiny of both supermarkets’ supply chains.

It seems logical to conclude that the merged business will create winners and losers. While the most efficient suppliers, and particularly those with direct links to the farm, will have little to fear and might even be looking to pick up extra business, anyone operating anything less than the leanest of enterprises can expect an uncomfortable time. Everyone will be watching very closely to see what happens next.

Taking on the discounters

There has been a huge amount of discussion over the ramifications of the deal, and its impact on prices, store numbers and consumers.

Patrick O’Brien, UK retail research director at GlobalData, defines the move as a “defensive merger” to combat the advance of the discounters, but also warns it will not be easy to integrate the two retail operations. ‘‘Sainsbury’s has largely succeeded with its acquisition of Argos so far, but to take on an even more challenging integration so soon after looks risky,” he says. “We believe that fighting the increasing challenge of the discounters will require more than just cost cutting and increasing buying scale. Tesco was reported in February to have been planning a cut-price fascia to go head to head with the discounters. Sainsbury’s may be considering using the Asda fascia to play a similar role, though this would have to involve pushing the brand much further into more convenient locations.”

Retail Economics’ chief executive Richard Lim, meanwhile, believes the scale of the combined group will enable better buying terms, the integration of Argos within Asda and operating efficiencies that would at least enable Coupe’s £500m target to be met. “If given the green light by the Competition and Markets Authority, it would be a game changer in the industry,” he says. “The potential tieup could deliver price reductions across a range of products, putting it in a position to challenge Tesco and the discounters head on.  

“Serving customers ‘whenever and wherever they want’ would take a giant leap forward with expertise in digital technology dovetailing with an expansive store estate. If executed well, it could become an effective differentiator of choice for many consumers given the strong multi-product, multi-channel proposition.” 

 

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