In a report, Winners in the food revolution, Barclays warned of the damage inflicted to suppliers in the wake of the proposed merger, including prepared meals manufacturer Bakkavor.
“Although the CMA’s provisional findings have put significant obstacles in the way of the merger, the pressure on both Sainsbury’s and Asda to improve margins in their businesses is still there,” said analysts.
“No matter whether the merger eventually happens we see a lot of disruption ahead and fear that own-label suppliers will remain under pressure. Walmart has indicated it wants to sell Asda – until that has happened we expect more instability.”
Sainsbury’s has since pledged to pay small suppliers within 14 days if its proposed merger with Asda is given the green light.
The instability caused by the proposed merger has put significant pressure on Bakkavor, which draws 90% of its UK revenue from four of the major retailers – including Sainsbury’s. Coupled with the uncertainty of Brexit, the merger threatened to kick off a major price war among UK retailers, driving costs down and with them, Bakkavor’s margins.
In light of these developments, Barclays downgraded the manufacturer’s stock from overweight to underweight and cut its price target to 125p from 212p.
The same risks surrounding the merger face other companies that supply ready-meals and grocery products to supermarkets, Barclays warned. With the increasing competition being generated by the Sainsbury’s deal and pressure from discount retailers, a supplier like Greencore has done well to build a dominant share of the own-label food-to-go market.
However, with food-to-go being the businesses only profitable market for the company, Greencore is increasingly at risk from any fluctuation in the sector. For these reasons, Barclays marked its stock as underweight at a target price of 190p.
Meanwhile, earlier this month, Bakkavor announced it was to close its Freshcook site in Lincolnshire, putting at least 160 jobs at risk.