Dark prospects for supply chain partners
The proposed £12 billion merger between Britain's Sainsbury and Asda grocery chains is not only a sign of competition desperation but poses undeniably bad news for both the public, in terms of diminished competition, and the hapless supply chains who have suffered years of unfair bullying practices at the hands of the four grocery behemoths, which will be cut to three unless the Competition and Markets Authority (CMA) blocks the deal. But can the CMA, now seemingly a toothless tiger following its approval of the Tesco-Booker merger, be trusted to put the consumers' interests first and why should the deal be blocked?
For many years the four big UK grocery chains, Tesco, Sainsbury, Asda and Morrison, have controlled over 70% of the UK grocery market which offered little by way of meaningful price competition, and a hard time for their suppliers grappling with up to 60 different, odious ploys to squeeze the last drop from them. Some of these ploys were sheer chutzpah while others were downright fraud, like the "Drop and drive" deliveries, whereby the retailers claimed goods never arrived and refused to pay for them, setting back 20 suppliers alone with £15 million in losses. Yet other wheezes bordered on blackmail. But then came two disrupters to give the big retailers nightmares, something I warned about in print 30 years ago, the rise of foreign, deep discounters and the disintermediating effect of online shopping.
In just a few short years the German discounters, Aldi and Lidl, have seen their share of the UK market soar from near nowhere to 12.6% of the total market, which has come at the expense of the big four. The big four know why the discounters can undercut them on price, typically up to 30%, but their big problem is that they cannot emulate the discounters' business model without huge disruptions to their own business models. The real reasons, therefore, behind this proposed Sainsbury-Asda merger are to buy market share through mergers and then make efficiency gains to slash costs, since they cannot easily buy the discounters as they are family owned. If the proposed merger goes through it will have nearly a third of the entire market, pushing Tesco's 27% market share into second place. But the synergy savings from the merger cannot be said to be anywhere near enough to lower prices enough to compete with the discounters.
The big four grocers are in a bind now that price is king in a cash-strapped market. The Albatross around their necks is their legacy of huge superstores trying to sell anything and everything under one roof, which carries a huge inventory cost. A typical Tesco superstore would stock up to 40,000 SKUs compared with only 1,600 for a discounter, which means much of Tesco's stocks are slow movers, whereas for the discounters they are all fast, and if they become slow they are mercilessly dropped. The cost of holding inventory can dwarf all other warehouse costs combined. When Tesco's founder, Sir Jack Cohen, proclaimed "Pile 'em high and flog 'em cheap" it was a workable business model but in those days SKUs were far fewer. Today, a more accurate mantra would be: "Pile 'em high, flog 'em cheap and flog 'em FAST."
So, then, if there is nothing in it for the consumers to benefit from the merger what will it be like for suppliers? Perhaps ASDA itself shows the way. Struggling as Britain's third largest food retailer, it was named last year as the worst of the UK's major supermarkets in the treatment of its suppliers. About 12% of the suppliers said ASDA rarely or never complied with the Grocery Supplier Code of Practice. With behaviour like that it is hardly surprising that Britain's Shadow Business Secretary, Rebecca Long-Bailey, called for the CMA to examine the combination of Sainsbury and Asda "as a matter of urgency" because of its potential impact on suppliers. There is no reason to expect that shabby supplier treatment will get any better and every reason to suppose it will worsen. Adverse competition and supplier consequences, therefore, should make it imperative to block this merger bid. Failure to do so would show the MCA as unfit for purpose and worthy of dissolution.