Suppliers could face a massive squeeze on prices if the CMA allows the Asda and Sainsbury’s mega-merger, experts have warned.
Sainsbury’s boss Mike Coupe has forecast the two supermarkets would be able to reduce prices by 10% across many everyday products if the proposed deal goes ahead, with the companies predicting synergies of £500m.
Shore Capital analyst Clive Black told The Grocer Coupe’s prediction of 10% price cuts would have suppliers “choking on their cornflakes.”
With a combined market share of 31.4% making them even bigger than Tesco, the merged entity would wield huge buying power.
“The synergies of £500m will be largely predicated on ‘improved efficiency and buying benefits’, which is code for squeezing its suppliers, especially when you consider than the synergies assume no store closures,” said SocGen analyst Warren Ackerman.
“The usual form guide is if a company supplies Sainsbury’s and Asda, they demand the best prices.
“This will be a daunting prospect for suppliers when you have so much power consolidated into just two players, and still have 12% of the UK grocery market in the hands of hard discounters.”
Ged Futter, founder of GSCOP.co.uk and a former Asda sales executive, said: “Mike Coupe describes this deal as a win-win but for suppliers, especially big branded suppliers, it looks like it comes with a huge risk
“He has got history with this. After the Brexit vote he came out and said suppliers should be paying to keep a lid on inflation. Now he clearly is expecting branded suppliers to pay for price cuts and this projected £500m of synergies.
“I think there is going to be a big squeeze if the deal passes the CMA. The question is whether the big suppliers will stand for it.”
Futter said there were also big questions over how own label suppliers would operate on behalf of a merged company.
“Currently you have companies like ABP supplying Asda and Sainsbury’s from different sites. What will happen to that arrangement?
“Yes Sainsbury’s has a strong reputation for private label, but are its private label providers suddenly going to have to start providing Sainsbury’s quality own label to Asda, at Asda prices?
Its absolutely fraught with complication.”
James Brown, head of retail and consumer goods practice at Simon-Kucher, said the prospect of the deal would send a “huge chill” through the supply chain.
“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.”
Federation of Small Businesses chairman Mike Cherry added: “A merger of this size will concentrate a lot of power in the hands of one giant company, and it is important that power is not misused to coerce small suppliers into accepting unfair contracts and poor payment terms.
“Those at the top of Sainsbury’s and Asda should explain how they plan to merge these two supply chains fairly, and give reassurance that cost savings won’t be achieved simply by milking their small suppliers for all they’re worth.
“When investigating this proposed merger, the Competition and Markets Authority should be looking for cast-iron commitments that a positive standard will be set for working with smaller suppliers.”