Suppliers fire warning shot over Sainsbury's and Asda merger

Sainsburys and Asda yesterday confirmed they are in advanced talks to combine their businesses. Picture: AP Photo/Matt Dunham

Sainsbury’s and Asda yesterday confirmed they are in advanced talks to combine their businesses, a move which would create a firm with a bigger market share than Tesco, the longstanding market leader in the supermarket industry.

The companies claim the move will allow them to slash the prices of everyday products by up to 10 per cent, but the proposal has sparked warning from producers that they will not settle for poorer deals.

Amid concerns over a lack of competition, the Federation of Small Businesses (FSB) cautioned that suppliers must not be coerced into accepting “unfair contracts or poor payment terms”.

It comes as the supermarket giants backpedalled on claims no stores would close as a result of the shock merger, admitting that regulators could force them to offload outlets as part of an inquiry into the deal.

Should the Competition and Markets Authority (CMA) grant approval, the new firm would have combined revenues of £51bn and boast a network of 2,800 Sainsbury’s, Asda and Argos stores across the UK.

Asda , one of Scotland’s biggest private employers, has 63 stores north of the Border, while Sainsbury’s has 100 food outlets – 65 convenience stores and 35 supermarkets.

While they employ tens of thousands of people in Scotland, the firms also have an extensive relationship with nearly 200 farmers and small firms.

Colin Borland, the FSB’s head of devolved nations, said that if the merger brought about lower prices, it could boost fragile consumer confidence and, in turn, growth.

But he said it was vital that Sainsbury’s and Asda made explicit how they planned to make savings without impacting on the food and drink sector.

“A merger of this size will also concentrate a lot of power in the hands of one huge player, and it’s important that this isn’t misused to coerce small suppliers into accepting unfair contracts or poor payment terms,” he said.

“Those at the top of Sainsbury’s and Asda should explain how they plan to merge their supply chains fairly, and give reassurance that cost savings won’t be achieved simply by squeezing their small suppliers.”

Scott Walker, chief executive of NFU Scotland, said: “If allowed to proceed, this merger will concentrate a lot of retailer power into the hands of one company.

“In a statement from the retailers on the merger, it was made clear that a primary objective will be to lower prices by ‘around 10 per cent on many of the products customers buy regularly’.

“That will set alarm bells ringing, not just for primary producers, but for other parts of the supply chain as well.”

Sainsbury’s has estimated a range of stores could be sold as part of its modelling ahead of the deal being ratified.

This estimate, based on possible outcomes from the CMA, investigation, has been to calculate that £500 million in cost savings will be produced by the merger. While an exact number of possible store closures has not been divulged by the chains, research firm GlobalData said at least 75 stores where Sainsbury’s and Asda overlap are at risk.

Bob Deavy, the GMB Scotland organiser, said the union was “inundated” with calls from worried Asda employees in the wake of yesterday’s announcement.

Sainsbury’s chief executive, Mike Coupe, said the merger was a “transformational opportunity to create a new force in UK retail”.

The CMA has said the merger is “likely to be subject to review”, adding that it will assess whether the deal could reduce competition and choice for shoppers.

FAQs

Q What will it mean for shop prices?

A The two supermarket giants have pledged to invest the cost efficiencies generated from the merger into lower prices. Sainsbury’s expects to save £500 million from merging with Asda, and has said it will lower shop prices by 10 per cent on everyday products.

However, this could have more widespread implications for shop prices if discounters Aldi and Lidl decide to cut their prices even further to stay ahead of their main-market rivals.

Q What will it mean for stores?

A The Competition and Markets Authority (CMA) will soon start its investigation of the proposed merger, raising the prospect that Sainsbury’s and Asda will be forced to sell off stores if they directly compete in local areas.

Sainsbury’s initially insisted it does not expect to shut any stores, but later said it may be forced to offload outlets by regulators. The supermarket says its store footprint is more focused on the south, and Asda has more stores in the north.

Q What will happen to Argos?

A Sainsbury’s bought Argos in 2016 and already has more than 200 Argos outlets within its supermarkets, having rapidly expanded over the past year.

It is expected that Argos will now start appearing in Asda’s stores, with Sainsbury’s chief executive Mike Coupe saying that the deal “brings scale in clothing and general merchandise.”

Q Why are the two companies joining forces now?

A All retailers are having to take drastic action to stay competitive during a critical time for the sector. With Amazon eyeing up the UK food market with its Amazon Fresh delivery service, food retailers will be nervous about its sprawling logistics network and buying power.

Sainsbury’s and Asda also have to fend off price competition from Aldi and Lidl. As a value supermarket, Asda has been under significant pressure as the German discounters have grown their market share.

Tesco’s recent merger with wholesaler Booker Group, cleared with minimal fuss by the CMA, will have given executives at Sainsbury’s and Asda confidence about the deal being green-lit.