Martyn McLaughlin: The big fear over supermarket merger

With Brexit set to hit food producers hard, the Sainsbury's and Asda merger is bad news, writes Martyn McLaughlin.

Customers may benefit from lower prices but the price is likely to be paid by small businesses and farms.

So the Big Four is on the verge of becoming the Big Three. The news of the pending £12bn merger between Sainsbury’s and Asda has been impossible to avoid in recent days, and with good reason.

The development marks the largest shake-up of the British supermarket industry since the merger of Morrisons and Safeway in 2004, and the mind-boggling numbers involved make clear it is a significant business story – the tie-up would create the UK’s biggest supermarket group, with about 31 per cent of total grocery sales and a value of around £15bn, including debt.

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The merger also represents a full stop of sorts for the narrative chronicling the ailing fortunes of Asda and Sainsbury’s in recent years. Much has been said and written about how they have been struggling, and it is evident the deal is mutually beneficial.

Walmart, the multinational conglomerate which pioneered the hypermarket concept in the US and bought Asda at the turn of the century, boasts close to 12,000 outlets around the world; but with only 642 of them in the UK (it has 563 in the state of Texas alone) its British presence is minimal, and in any case, does not offer the potential for growth as places like China.

Sainsbury’s, meanwhile, has been rapidly losing market share to the successful no-frills model of German supermarket discount chains, Aldi and Lidl – a legacy of the squeezed pound and disposable incomes, but also a sign of how Sainsbury’s has failed to appeal to customers of upmarket brands such as Marks & Spencer and Waitrose.

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Suppliers fire warning shot over Sainsbury's and Asda merger

But in all the analysis of how Britain’s supermarket oligopoly is set to contract even further, it has been frustrating to see so little discussion of the issue that really matters – how it stands to hit ordinary households and small suppliers hard.

Those driving the merger have said that the combined forces of both companies will allow prices on commonly purchased products to be slashed by as much as 10 per cent.

Such a promise is designed to reassure punters and demonstrate how fusing the two firms’ backroom operations will result in supply chain efficiencies. While that may allow it to ramp up its loss-leader offerings, it is hard to see how it will bring about a wide-ranging and sustained fall in prices.

What possible incentive would there be to do so when, together with Tesco, the combined firm would command a near 60 per cent share of the total supermarket sector, covering not just food, but clothing, homewares, and toys? For all the reassuring statements being issued, the merger would create a duopoly. Whichever way you look at it, that spells bad news for consumers.

The biggest blow, however, would be felt not by ordinary households, but the ranks of small producers, farms and growers who keep the shelves of Sainsbury’s and Asda stocked.

Labour’s shadow business secretary, Rebecca Long-Bailey, has warned the merger would grant the combined company “immense” purchasing power, giving them the opportunity to “bargain very hard” with suppliers.

If anything, this is an understatement. In a marriage which stands to combine weaknesses as well as strengths, the prospect of improved buying power is the single biggest driving force. Unsurprisingly, that is giving many small firms reason to be nervous.

While Sainsbury’s, which sells more £650m worth of Scottish produce every year from 86 local suppliers, has a generally good relationship with small firms, the reputation of Asda leaves much to be desired. Only last year, the chain, which sources over £1.2bn worth of Scottish produce annually from more than 100 Scotland-based firms, was named the worst of the UK’s major supermarkets for the way it treats suppliers.

The Groceries Code Adjudicator also found that Asda demanded up-front payments worth up to a quarter of the value of the annual sales of particular products in order for suppliers to retain their place on its shelves.

Some firms who refused to make the payments were given notice that they would be ousted within as little as four to eight weeks, according to the watchdog.

Asda has since promised to make improvements, but it hardly inspires confidence at a time when suppliers are genuinely fearful over the repercussions of having one less buyer in an already lean market.

As the talks between Sainsbury’s and Asda executives reach a late stage, there is also an elephant in the boardroom that cannot be ignored in the form of Brexit.

Research by the Institute for Fiscal Studies has found that while 17 per cent of overall consumer spending goes towards imported goods, the figure jumps to 30 per cent when the food industry is assessed in isolation. It means that changes in the costs of imports, whether through tariffs or movements in exchange rates, stand to have a significant impact on the price of goods on supermarket shelves.

If imports cost more that could put paid to the idea that the combined supermarket will slash prices. And this may also pressure it to use its newly powerful position to hold small and medium firms in its supply chain to ransom.

All of which means it is vital the Competition and Markets Authority bears its teeth and ensures the merger is for the greater public good, and not just in the interests of the City.