Partner and Head of the UK Consumer & Retail practice James Brown reflects on the recent news of a possible Sainsbury's-Asda merger:
Sainsbury's and Asda have huge buying power that already provides them with rock bottom supplier prices. Where do grocery manufacturers and farmers go from there when the merger gives them a larger combined market share? The prospect of this merger will send a huge chill up and down the whole supermarket supply chain, while their current suppliers will be braced for demands for further price cuts that many will not be able to deliver.
Could this merger lead to reduced prices for shoppers? A few maybe.
Cost and operating synergies could allow more room to invest in lower prices, but lower prices from better deals from suppliers in the mid and long term? Unlikely. Asda and Sainsburys shift huge volumes and already attract low pricing. They won’t sell any more product over all, so it’s not as though there are real volume benefits for suppliers.
The announcement that prices will be cut has grabbed attention - but the wording is carefully chosen, "We expect to lower prices by c.10 per cent on many of the products customers buy regularly". So key value items - those that shoppers use as benchmarks and shape price image, are likely to drop. Beyond this, the impact is not at all clear.
There will be some quick wins for the combined Asda/Sainsbury procurement team that suppliers will inevitably stump up. Some will be nervously looking at their line prices to see where they’ve given Asda better deals than Sainsbury’s and vice versa, as one of the first moves from the newly emboldened buying teams will be to demand the lowest from each - cherry picking deals
However, a consolidation of a sector - from the "Big 4" (Tesco, Sainsbury, Asda, Morrisons) to the "Big 3" would not usually be expected to spur on competition. In this case though, will it re-ignite the supermarket price war as the underlying fierce competition that lead to the price war hasn’t gone away?
The hard discounters (Lidl & Aldi) are still growing strongly, Tesco has emerged with renewed strength on top of the Booker merger, and the impending threat of the Amazon behemoth still looms.
This latest mega-merger in the grocery sector has come as shock news to suppliers still dealing with the fact that the Tesco-Booker merger has been waived through by the competition authorities. This deal is going to attract a lot of scrutiny - not least from the CMA. A core part of the CMA mission is to: ‘make markets work well for consumers, businesses and the economy.’ Whilst the CMA's overarching remit is consumer, there is a strong case to be made that increasing the buying power to the extent that suppliers suffer will be detrimental to consumers in the longer term.