With the industry still digesting the momentous news that Sainsbury’s and Asda have a agreed a deal to merge their two business, one of the biggest concerns raised so far has been the impact the tie-up will have on suppliers.

The two groups insisted yesterday that the deal will create “significant opportunities for suppliers to develop differentiated product ranges, become more streamlined and to grow their businesses as the combined business grows”. However, they also pledged to cut prices on everyday products by around 10%. Whilst the tie-up should lead to greater operating efficiencies, it is feared that suppliers will have to shoulder a significant proportion of the planned price reductions.

SocGen analyst Warren Ackerman, told trade magazine The Grocer: “The synergies of £500m [announced yesterday] will be largely predicated on ‘improved efficiency and buying benefits’, which is code for squeezing its suppliers, especially when you consider that the synergies assume no store closures.

“The usual form guide is if a company supplies Sainsbury’s and Asda, they demand the best prices. This will be a daunting prospect for suppliers when you have so much power consolidated into just two players, and still have 12% of the UK grocery market in the hands of hard discounters.”

Sainsbury’s said yesterday that the bulk of the synergies it has identified will come from eliminating pricing discrepancies between the two chains. Clive Black from Shore Capital told trade site Food Manufacture: “There are few good points here for suppliers, duopoly rarely is [good for suppliers]; of the £500m of synergies, £350m are set to come from the trade, what is good about that?”

Meanwhile, Ged Futter, founder of GSCOP.co.uk and a former Asda sales executive, also told The Grocer there were big questions over how own label suppliers would operate on behalf of a merged business. He is quoted as saying: “Currently you have companies like ABP supplying Asda and Sainsbury’s from different sites. What will happen to that arrangement?

“Yes Sainsbury’s has a strong reputation for private label, but are its private label providers suddenly going to have to start providing Sainsbury’s quality own label to Asda, at Asda prices? Its absolutely fraught with complication.”

Shares in Greencore also fell yesterday as investors fretted about the potential adverse impact on the group’s UK sandwich business from a proposed merger. It is the sole sandwich supplier to the two supermarket chains, which combined would rank as Greencore’s second-largest customer, behind Marks & Spencer.

Greencore’s scale in the sector should leave it less vulnerable to a material impact from the enlarged group. However, Jonathan Buxton, partner at Cavendish Corporate Finance, stated “hard-pressed UK supermarket suppliers will rightly be concerned that they will face further customer concentration and pressure on margins”.

The impact could be most significant for smaller suppliers that have already had their margins squeezed by higher operating costs and the rise of the discounters in recent years.

Austin Sugarman, MD of Fine Foods International, told the BBC that there will be “plenty of losers from this,” adding: “If suppliers are going to have to come up with the savings, then we’ll see consolidation in the supply base.

“That means closing factories, that means losing people and it means effectively less choice for consumers.”

Gordon Polson, director of the Federation of Bakers, added: “We already operate in a very competitive retail environment. We just don’t see possibly how our products could be reduced any further.”

Ian Cass, MD of the Forum of Private Business, echoed his concerns: “If suppliers are asked to reduce prices by 10% to stay on the Sainsbury’s-Asda supply chain, then some small companies could go out of business.”

However, David Sables, CEO of supplier consultancy Sentinel, said that whilst some suppliers will undoubtedly be “quaking with fear” about the merger news, others will have more power to negotiate with the new firm than they realise. “Suppliers need to get better at saying no,” he said.

“Supermarkets don’t want to have complaints from shoppers because their favourite crisps, biscuits, coffee or soap powder have come off the shelves.”

Sables stressed that small businesses need to make sure they understand their rights under the Groceries Supply Code of Practice (GSCOP), and also understand that supermarket chains tend to hold the threat of getting rid of suppliers as a bluff.

“There is a game being played about the demand for cheaper prices, and very often when suppliers have said no and they’re walking away, nine times out of 10 that’s the price they get the contract to supply at.”

Meanwhile, Patrick O’Brien, UK Retail Research Director at GlobalData, commented: “We can see why this deal would be attractive to Asda as their low price stance has been undermined by the discounters, and it has been unable to position its brand or customer experience as offering more than the discounters, in the way that Tesco and Morrisons have been able to do, as they never traded on being the cheapest.

“However, I don’t think we should get carried away with Asda Sainsbury’s talk of price cuts. The wording of the statement makes it clear that it will aim to reduce prices on some products – its less a commitment to a price war than an attempt to convince that Competition and Markets Authority (CMA) that the deal is good for competition.”

Other analysts suggested Sainsbury’s purchase of Asda, and the more competitive pricing conditions that it could generate, will make the British market less attractive for Amazon which is starting to grow its operations in the grocery market.

“Sainsbury’s and Asda are very aware of a potential Amazon acquisition in the UK supermarket industry, which is why they are looking for scale in order to safeguard their future,” said Philip Benton, a consultant at Euromonitor.

Given Amazon’s existing supply arrangement with Morrisons, the prospect of a move by the online giant for the UK’s fourth-largest grocery chain has been raised in the trade press in recent months since the Whole Foods deal.

Commenting on yesterday’s deal, Hargreaves Lansdown analyst Laith Khalaf said: “It raises a question mark probably for anyone who is thinking of entering the market. We’re not entirely sure to what extent Amazon is committed to the UK grocery market, but this may give it pause for thought.”

However, he noted that Amazon’s size, scale and profitability allow Amazon to often forego immediate concerns around profitability.  “They’re usually willing to take a hit if they think there’s a long-term game they can win,” he said.

Further insight: Sainsbury’s-Asda deal in nine charts – see the BBC website

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