The Sainsbury/Asda Merger – what does it mean for suppliers?

After the recent bolt out of the blue announcement that Sainsbury and Asda have been in talks about a merger for over a year, at Sellex we thought we’d provide some thoughts on what this means for suppliers and the Grocery industry.

The merger (or is it a takeover with Sainsbury set to get 58% of the shares and most of the key seats on the Board) is set to further transform an already turbulent Grocery market in the UK – the Big 4 will become the Big 3, with the continued growth of the discounters not slowing and the consolidation trend which has seen Tesco merge with Booker and Coop merge with Nisa going even further. The need to compete on price with the discounters, lower costs to preserve profit and respond to flagging growth have no doubt all contributed to driving these previous fierce rivals together. The City seems to approve with shares in Sainsbury increasing 15% adding £600m of capital value.

The new combined business will have revenues of £51bn, will become the no.1 retailer in the UK at a stroke with a combined share of 31.4% (before any store divestments) putting Tesco into second at 27.6% and Morrisons  a distant 3rdat 10.5%. The Discounters continue to be the fastest growing retailers in the UK with a combined market share for Aldi and Lidl of 12.7%.

The new group will have 2,800 stores but the initial noise has been over whether there will be a CMA investigation – the politicians have been calling for one and it seems Mike Coupe and Asda are pushing for a full investigation to move things along quickly. With over 1 in 10 stores close enough to prompt concerns using previous CMA methodology it is highly likely any merged group will need to divest stores – estimates of between 75 and 197 stores depending on which methodology the CMA use have been quoted which would result in combined market share of 24.3% in the worst case and 27.5% in the most optimistic – this would still mean the combined group being the largest retailer in the UK or very close to it.

It is early days in understanding how the two retailers will combine their offer to shoppers but it seems there will be two brands with separate fascias – Sainsbury will target the more premium shopper and develop the convenience formats while Asda will focus on value targeting the discounters with a smaller range and more own label.

So what does all this mean for suppliers?

The media have been talking of 10% pricing savings for shoppers paid for by the estimated £500m cost savings that have been identified – the bulk of this is expected to come from buying savings, indeed price files of the two businesses have been shared with a 3rdparty already and this will no doubt form the target for the new buying team to deliver. The pressure will come when the merger is cleared and the two businesses can share their pricing files, expected to be in the middle of next year (2019).

This may seem like more bad news for suppliers and sleepless nights for already hard pressed account managers, but at Sellex we believe if suppliers use this time to prepare for the inevitable negotiations they will be in a better place than waiting for it to happen and may even identify some opportunities for growth. This preparation phase should cover the following areas;

  • Creating transparency and visibility of all current prices, terms, discounts and payments at SKU level across both customers at a minimum and for all customers to get the most out of this work. This would highlight the risk and opportunity available.
  • Model and develop a new pricing and terms structure which recognises the new reality but also identifies the conditionality required from any new investments based on growth opportunities and strategic objectives for the supplier and its categories. This could include improved efficiency savings from a larger business aswell as growth drivers for the supplier.
  • Develop an implementation plan including training the negotiating team, creating the selling story, role playing the negotiation and developing the tools needed to track and deliver.

In our experience the suppliers who are prepared and can respond with a principled and structured set of proposals will get the best results.

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