The chief executives of both retailers appeared before a Committee hearing this morning to answer questions on the proposed merger and the potential impact on the market.
Headed by Neil Parish, the two retailers were grilled by the Committee, which warned that suppliers would suffer as a result of the proposed merger.
Parish said: “You’re going to save 10% and you’re going to do it at the expense of the suppliers. You’re going to be a big beast in the market and you’re going to extract more pain on these [suppliers]. It’s not just going to be Nestlés of the world, but smaller suppliers as well.”
Asda chief executive Roger Burnley went on record to say that the 10% price saving would not come from suppliers.
Homing in on Asda’s and Sainsbury’s differing pork supply models, Parish asked which supply model the merged business would use and suggested that it would follow the “cheaper import” route. “You will take the model of the supply. This [merger] will be the lowest common denominator and the suppliers will suffer.”
First announced in late April, the merger between the two retailers would create an entity with a greater market share than Tesco. Asda owner Walmart would hold 42% of shares of the combined business while the two retailers have pledged to operate separately. Currently under review by the Competition and Markets Authority, if approved, the combined annual sales would total £51bn and the merged business would hold 2,800 sites across the UK.
Burnley responded that the two retailers would operate as separate brands, which was dismissed as “children’s tales” by Parish who claimed that they would eventually fall under one model.
Sainsbury’s director of brand Judith Batchelar said the retailer planned to keep its current relationship with suppliers, but admitted she didn’t know about Asda’s practices, which was dismissed as “unbelievable” by Parish.
Burnley said that suppliers had expressed “cautious optimism” over the merger and suggested that suppliers could benefit from operational efficiencies. “They need and want us to be successful and see volume growth.” This was echoed by Sainsbury’s chief executive Mike Coupe.
Coupe was also taken to task about supplier payment terms, which could be up to 60 days, a length of time Parish felt was unfair to producers. In response, Coupe said he stood by Sainsbury’s track record of supplier payment and relationships. He added that it was likely that some shops would have to be disposed of for the merger to be given approval.
Burnley added that the merger would “open opportunities” to smaller suppliers to supply both retailers. However Committee member Angela Smith said this would create more competition among suppliers, with “winners and losers”.
Committee member David Simpson also questioned Asda’s sustainable business director Christopher Brown on discussions with suppliers and partnerships. Brown said that “some [suppliers] were already thinking about the implications and operational efficiencies”, and that “Asda has shown themselves to be good customers in the past”.
The Committee hasn’t been the only one to express concern over the merger. Clive Black of Shore Capital said it would create a “duopoly” that would be bad for manufacturers while a report from the New Economics Foundation claimed the merger could result in the loss of up to 2,500 jobs.
Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: “Sainsbury’s and Asda have promised to cut prices for consumers, but somewhere along the line, someone will pay. Many UK suppliers are running their business on fine margins, and exchange rate volatility has already led to public spats between suppliers and the big supermarkets because of higher import costs. With so much of the UK’s food supply chain dependent on one customer, it will be more important than ever to ensure suppliers are paid fairly and supported in difficult times.
“If the merger is approved, it is crucial that procurement teams take the opportunity to strengthen relationships and adopt a more transparent and supportive approach so the pool of suppliers remains diverse. By reducing the number of trucks on the road and creating a more efficient system of warehouses, the new business has the potential to lower its carbon footprint and reduce costs. Brexit poses a significant challenge, however, and these savings will need to be put to good use, creating a supply chain that can adapt to uncertain customs arrangements, tariffs and continued currency instability. Reliability and quality will be just as important as price.”
The Competition and Markets Authority (CMA) is currently investigating the merger. In its summary of responses from the first invitation to comment, the CMA noted that many respondents had expressed concern over the potential increased buying power that the combined company would hold. Reduced margins for suppliers, being forced to recoup lost profits by charging other retailers more and reduced choice for consumers were cited as fallouts from this increased buying power.