Posted on May 02, 2019 in Land and Rural Business by Neil Falconer
The proposed merger between Asda and Sainsbury’s will not go ahead following a definitive final report from the Competition and Markets Authority (“CMA”).
The report, published on 25 April, has expressly prohibited the merger on the basis that it would result in higher prices and poorer quality, range and service for consumers, as well as a substantial lessening of competition in the grocery and fuel sectors.
The CMA’s findings focus exclusively on the impact of the merger on consumers, but the deal would have undoubtedly had an impact for businesses operating in the grocery supply industry too. The existing concentration of competition within the sector, and the various statements issued by the retailers during their campaign to win over the CMA, suggest the merger could have had an equally concerning impact on suppliers.
The merged business would have overtaken Tesco as the UK’s biggest supermarket. It would have held a 26.7% share of the UK grocery market and further concentrated the already limited competition in the grocery sector.
During the negotiations with the CMA, Asda and Sainsbury’s issued a joint statement promising that the merger would see a 10% price cut on everyday household goods. Given the tight margins already prevalent in grocery retailing, it seemed likely these reductions would be procured by further squeezing the suppliers to each business.
The magnitude of the merged entity within the market would have increased the retailer’s purchasing power to renegotiate prices, and cherry pick the preferred existing supplier arrangements from the Sainsbury/Asda bank of suppliers. The existing lack of purchaser choice within the grocery sector could have left suppliers hard placed to push back.
Whilst the plan was to retain the separate Asda and Sainsbury’s brands post-merger, the new entity would not have been prevented from adopting a coordinated buying strategy. Indeed, generating value through synergies such as this was one of the key drivers of the proposed deal. Consolidating the supplier base could have forced businesses, who offer a different price to both, to offer the lower price regardless of any distinction between the two brands.
Harmonisation could also have led to a decrease in the number of suppliers, if the supermarkets opted to pick and choose the cheapest options. Retained suppliers to one of the merger partners may have struggled to meet the demands of the new entity given the risk of volume expectations increasing as a result.
Businesses in the grocery supply chain may therefore breathe a sigh of relief at the finality of the CMA decision. Following the publication of the report, Asda and Sainsbury’s announced their mutual agreement to terminate the transaction rather than pursuing any avenues to appeal the CMA’s findings. With the backdrop of Brexit and its impact on the agricultural sector, suppliers can take comfort that the risk of uncertainty and further challenge to the grocery sector posed by the merger has been mitigated for the time being.
For further information and advice supply agreements please contact Neil Falconer or a member of our Land and Rural Business Team.
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