The plan to merge Sainsbury’s and Asda promises radical change to the grocery supply chain landscape.
There is no doubt that this is a defensive move in response to the increasingly tough market conditions with the increasing penetration of the discounters and a growing threat from online retailers, such as Amazon, which is just starting to move into grocery.
The impact of the discounters on the big retailers is clear from the statistics put together by Kantar Worldpanel. Between 19th July 2015 and 22nd April 2018, all the big four have lost market share to the discounters.
Kantar’s figures suggest that one percentage point of market share is currently worth £268.3 million (this figure is for the 12 weeks to 22nd April 2018). A rough calculation suggests that over the period, Tesco, Sainsbury’s Asda and Morrisons have lost market share to the tune of some £750 million (on a quarterly basis). In contrast, Aldi and Lidl are up by about £830 million.
Not surprising, then, that Sainsbury’s and Asda have highlighted the potential savings from the deal and the opportunity to cut prices by some ten per cent on many regularly bought items.
They expect to save some £350 million on procurement – through better harmonised buying terms. Clearly, there will be concerns among suppliers who are already being squeezed. And the Groceries Code Adjudicator is likely to be watching very carefully. Already, Tesco and the Co-op have fallen foul of the GCA.
The Forum of Private Business has called on Sainsbury’s to provide assurances to its supply chain. Forum managing director Ian Cass said: “We’re very concerned that the new, larger business could use its position to further squeeze the small businesses in their supply chain, who are already working on tight margins.”
And the National Farmer’s Union has promised to support any investigation by the Competition & Markets Authority. President Minette Batters said: “With just over 31 per cent of the market potentially being held by one company the CMA is likely to consider the impact on shoppers – but that must also take account of changes to supply arrangements that could give rise to a reduction in choice and availability over the long term. The impact of the whole supply chain, all the way down to farm level, needs to be carefully assessed.”
Sainsbury’s chief Mike Coupe has made it clear that there is no plan to close stores as a result of the merger. However, the enlarged business will have two logistics networks, and it must be looking at opportunities to rationalise that.
Some £75 million of operational cost efficiencies have been identified, but the companies have also identified unquantified synergies from “leveraging fixed assets”.
According to Sainsbury’s web site, it currently has 34 distribution centres (including Argos). Asda says it currently has 21 food depots, three clothing centres, two ambient GM hubs, two import centres, two dot-com fulfilment centres and nine ASCs. By comparison, Tesco says it currently has 23 warehouses across the UK.
Integration of the two retailers’ industrial infrastructures across the country would give significant economies of scale and help reduce supply chain costs, says Len Rosso, head of industrial & logistics at Colliers International. “The phenomenal growth of industrial market in the last few years as a result of e-commerce means their large warehouse portfolios could be worth more than their retail units, providing real cash benefits. With industrial yields at historic lows, these assets could provide better returns to investors than their shops.”
Last year Sainsbury’s said it had achieved cost savings of £185 million in logistics, procurement, store operations, energy efficiency, and marketing – and is looking for £500m of further saving over the next three years.
Asda has also been working on cutting operating costs. In its most recent annual report (2016) it highlights its commitment to the Asda “Low Cost Operating Model”. This “has resulted in improved operating efficiencies and delivering productivity savings across the stores, home shopping, distribution centres and home offices”.
It is clear from all this that radical changes lie ahead for the grocery supply chain, but it won’t be until the CMA makes its attitude clear that we know exactly how big those changes will be.