When the UK’s second and third largest retailers — Asda and Sainsbury’s — announced their surprise merger last month, the new grocery business became the largest private sector employer in the UK, overnight.
The £15bn merger gave birth to a new grocery superpower that will take 60% of money spent on groceries in the UK. The mammoth deal, meanwhile, has triggered a major retail competition inquiry, not seen since Morrisons acquired Safeway in 2003.
Why is grocery consolidating?
In grocery retail, we’ve already witnessed deals and acquisitions emerging. Most recently, Tesco, operating more than 3,000 shops in the UK, announced a £3.7bn takeover of wholesaler Booker. Booker, meanwhile, supplies more than 5,000 stores in franchises.
This is not uncommon in a landscape of squeezed margins and flattening demand. A destructive combination of inflation, rising costs, and price wars between the original ‘big four’ and German discounters Aldi and Lidl, has pushed margins down across the sector from an average of 5% to between 2 and 3%. Grocery retailers need to take decisive action — whether that’s more data-driven decision making and automation, or explore mergers and acquisitions — to win customers and boost their profits.
"UK retail is vastly oversupplied. There are far too many mouths to feed. There has to be consolidation, there has to be capacity taken out of the market.”
Richard Hyman, Richard Talks Retail
How does the merger lower prices?
Sainsbury's outlines that the retail sector is undergoing rapid change as customers' shopping habits evolve, with a shift to smaller baskets and more frequent shopping trips. In its official statement, the new grocery giant has promised that shoppers will see 10% cut in the price of popular foods as a result.
With an growing expectation for greater value, choice and convenience, there’s been an increasingly competitive landscape across grocery. By bringing together two of the ‘big four’, the two retailers expect to create a stronger and more resilient business. But how?
“[Retail] has never been more competitive and customers have more choices than ever, not just in the grocery sector but in other retail sectors. You can see the consequences of that playing out every day.”
Mike Coupe, CEO of Sainsbury’s
Supply chain optimization
According to Coupe, the synergies created by the merger would deliver at least £500m in cost savings and other benefits, largely as a result of improved efficiency and better deals with suppliers.
As well as the potential for greater scope to gain lower prices for suppliers, there is likely to be other supply chain enhancements; a larger firm will be able to share transport networks and achieve lower average costs. Other big grocery merchants are certainly optimizing their supply chains with KPI-driven forecasting and replenishment, like that offered by Blue Yonder, to deliver more cost savings.
Around £350m of the £500m savings are expected from harmonising buying terms, £75m from opening Argos in Asda stores and £75m from operational efficiencies.
Investment in tech
Sainsbury’s CEO Mike Coupe said that the new firm would enable greater investment in technology to offer better services and experiences for its customers. The new organization is likely to have more capacity to invest in emerging technologies and data science, to garner insights from its huge combined datasets.
“Understanding customers (this means much more than simply owning mountains of data) is the critical prerequisite of being commercial.”
Richard Hyman, Richard Talks Retail
Overall, the merger would enable streamlined supply chains and logistics. As well as this, there are opportunities for investment in tech that optimizes price, quality, and range. while also creating more omnichannel flexibility for customers to shop in store and online.
AI-driven solutions from Blue Yonder, for example, could provide the new retail giant the opportunity to automate high-level strategic stock and price decisions, as well as offer highly personalized experiences for customers.