Supermarket merger to have huge supply chain impacts

After a decade of growth, the global contract logistics market contracted by 3.3% in 2020, as a strong H2 prevented worse outcomes.

The proposed merger between Sainsbury’s and Asda promises to have profound and widespread logistics implications.

The two companies announced over the weekend details of a planned £13bn merger. Asda’s US owner Walmart would receive £3bn cash plus a 42% stake in the new business, which would be led by Sainsbury’s CEO Mike Coupe. Ultimately, the deal would create the UK’s largest supermarket, leapfrogging Tesco’s, with combined revenues of £51bn giving it a 31% share of the market.

The big four players in the UK grocery market (Sainsbury’s, Asda, Tesco, Morrisons) have lost combined market share in recent years, owing primarily to the expansion of discount retailers such as Aldi and Lidl. Furthermore, following the Brexit vote, many suppliers were forced to raise their prices after the value of the pound dropped. Facing a harder operating environment, market consolidation should not come as too much of a surprise but given that there are only four major players in the UK, this is an alarming move.

Sainsbury’s stated that it expected cost synergies of at least £500m, “comprised largely of buying benefits, opening Argos in Asda stores and operational efficiencies.” It went on to say that there are no planned Sainsbury’s or Asda store closures as a result of the combination, and Coupe later stated that there would be no “in-store” job losses.

Many of these stated aims should perhaps be taken with a pinch of salt. The Competition and Markets Authority (CMA) will no doubt have a say in the transaction and industry analysts have warned that the CMA may enforce store sales.

Suppliers will certainly feel the pinch from the proposed merger. Coupe stated that the company wanted to achieve 10% price reductions on everyday products. This is extremely concerning for smaller suppliers who may look to consolidate if the new company is successful in negotiating these players into lowering their prices.

Coupe stated that no “in-store” job losses would be at risk but did not provide the same guarantees for other roles. Back-office and warehousing jobs may well go in order to find the necessary cost savings. Sainsbury’s operates 34 regional distribution centres across the Sainsbury’s and Argos brands. Asda Logistics Services includes 39 nationwide operations. Combined, these serve 2,800 stores. Tesco, the present market leader, operates considerably more stores (3,400), though its logistics network has far fewer distribution centres (23).

There is no set definition for how many distribution centres a supermarket should have per store, and there is no guarantee that a high number of Sainsbury’s-Asda DCs will close. But cost benefits could be realised from closing some. There are currently 75 Asda stores in the same postcode district as a Sainsbury’s (excluding Sainsbury’s Locals). These could perhaps be served by the same distribution centres. MP Mark Menzies, who worked at Asda’s head office for 11 years, told the House of Commons that distribution centres “will be absolutely hammered a year or two years down the line if this merger goes ahead” and MPs across the house expressed their concerns over potential job losses.

If distribution centres are sold, cost benefits would not only be from an operational standpoint. Because the value of warehousing property has also soared in recent years due to the growing demand for e-commerce logistics space, sales of these distribution centres could well go some way to achieving the cost savings outlined.

Where will the deal leave the host of LSPs that serve the pair; XPO, Wincanton, Clipper Logistics, iForce, NFT, DHL and Allport for example? As the new company looks for cost synergies, it will no doubt appraise its logistics contracts. The threats and opportunities for these companies will become apparent once the new company’s operational details emerge.

Source: Transport Intelligence, May 3, 2018

Author: Andy Ralls