What the global wine trade needs to know about proposed Sainsbury’s-Asda deal
By Richard Siddle
Just when you thought the UK wine market could not get any more competitive or hard to do business in then suddenly the stakes have been raised even higher this week with the news that Sainsbury’s has made an audacious bid to takeover rival Asda, its rival Big Four supermarket chain.
However way you look at this proposed £13 billion deal is game changing. For a start it will catapult the new combined business to become the number one grocer in the UK knocking Tesco off its perch for the first time in decades.
If the competition authorities allow the deal to go ahead it means the new Sainsbury’s-Asda business will have combined sales of £51bn a year and 31% share of the market, pushing Tesco down into second place with only 28%.
But despite all the nicely staged photos of the Sainbury’s, Asda and Walmart powers that be smilingly away on news of the deal it’s not a given that the UK’s Competition and Markets Authority will wave through a deal that will see Sainsbury’s and Asda stores, in some parts of the country, the other side of a retail estate from another.
Already retail analysts have been adding up the numbers, crunching the demographics and working out which postcodes it will have to give up stores in order to get the deal through. Mike Coupe, Sainsbury’s chief executive, might have been adamant that no stores will close as a result of the deal, but that’s an easy promise to make when he knows it won't ultimately be him that makes that decision.
What he did not say, though, is what is likely to happen to all the back office support services and head office functions that must see some duplication if the deal goes ahead.
That's the bit its global supply base is going to be interested in and it might take some time before we get any real clarity on that.
What we can expect
But what we can do is look at the track record of the two businesses. Both are looking to work with less rather than more suppliers. Both have made it quite clear they want to push their private labels in favour of branded products and still see huge opportunities in developing exclusive and tertiary brands that can sit somewhere in the middle. Other than a few must have household brands really any brand’s position is up for grabs and has been for some time.
One stark fact that came out in the wash this week is how reliant Sainsbury’s already is on only a limited number of suppliers. A staggering 85% of the products it carries come from only 100 suppliers.
What that figure is at Asda is not known, but it’s not going to be dramatically different even if its customer base are traditionally more brand focused than Sainsbury’s which has a longer, more respected private label offer.
The UK is not alone. As the market share of the big retailers and operators go up, the routes to market for suppliers decreases. It’s a trend we are seeing the world over.
Which is all good news for the major, truly global wine players out there. The Concha y Toros, the Accolade Wines, the Treasury Wine Estates. Equally the big private label suppliers, shipping large volumes of bulk wine to be bottled in market.
But is it? There are a number of factors to bear in mind even for them before they start popping open the screwcaps.
With sales of over £50 billion the combined buying power of Sainsbury’s and Asda is going to be transformed. Yes, there will be separate buying teams to source wine for what are very different demographic groups of customer. But at certain price points and for certain types of wine, be it a classic Pinot Grigio, New Zealand Sauvignon Blanc, Argentine Malbec or Rioja Crianza, then it makes perfect sense for Asda and Sainsbury’s to combine forces for their collective good.
Which will no doubt mean demands for more wine at lower prices. Just at time when the rest of the world is crying out for more wine, and is prepared to pay more for it.
What role will IPL play?
It will also be fascinating to see what now happens with Asda’s separate wholesaling and sourcing business IPL, which is responsible for going direct to producers around the world to fill up not just Asda’s shelves, but Walmart as a group, with core products from fresh produce to wine that it manages, controls itself with very little third party suppliers involved before.
Much of the work at IPL goes on, perhaps not surprisingly, under the radar. Rarely do we get to know much more about what it does than what is contained on its belt and braces website.
But it’s clearly a very effective model for Asda and one that Walmart has replicated in other key markets as well as back in the US.
Its mission statement is clear enough: “We are here to improve the value, quality and availability of our products whilst also lowering the cost of goods to Asda and Walmart so they can pass on these savings to customers around the world. Our mission of creating a unique supply base capability enables us to support Asda and Walmart’s mission to Save Money. Live Better.”
Whether its suppliers “save money” or “live better” is open to question, but it’s certainly a model that the executives at Sainsbury’s will be looking to get their hands on. Particularly as it has announced it expects to make £500m a year savings through the new business.
There has, for example, been analyst speculation this week that Sainsbury’s might look to expand the IPL model to create a bigger, dedicated wholesaler business. One that could not only supply its own retail estate, but also look further afield and supply the main convenience, and independent retail market and, if that works, move on to the on-trade and pubs, bars, hotels and restaurants.
For ultimately Sainsbury’s move for Asda is being seen as very much a defensive and reactionary play. One that hopefully helps both chains put a stop to their falling profits, but also respond to Tesco’s increasingly inspired move to acquire the cash and carry and wholesale business of Booker Cash and Carry.
An acquisition that did not increase its share of the multiple grocery market, but instead diversified the business into the wider convenience and mainstream on-trade sectors.
The focus will now be on how Sainsbury’s uses this Asda deal to fight back and expanding the IPL model looks an obvious way to go. Particularly as Walmart would have a 42% stake in the business and two seats on the new Sainsbury’s board. What it does with IPL will also be in Walmart’s international interest and it will be there ready and waiting to push it in the right direction.
Good timing
But all of this is a little way down the road. In the meantime both Sainsbury’s and Asda will have to continue to work with what is a toxic cocktail of increased costs, higher rents and staff wages, and decreased consumer spending.
Market conditions that have seen Sainsbury’s also announce this week a 19% fall in its annual profit for the 52 weeks to March 10 to £409m, whilst Asda’s own operating profits for 2017 are down 15% to £720m.
Wine suppliers will be hopeful the new deal will help push better margins back into the UK trade. Margins that have been hit across the industry, with Sainsbury’s working to operating margins of just over 2%, down from 3.47% in 2013/2014 and the 5% to 6% the big chains were achieving in their hey day. We have already seen with the collapse of Conviviality how far depressed margins can push a business.
Premium and discounting push
There might also be new premium opportunities for wine suppliers to capitalise on.
Rather than Sainsbury’s continue to try and be all things to all shoppers, it can now potentially get back to what it originally did best and operate more as a premium supermarket chain, closer to Waitrose and Marks & Spencer in aspiration.
Asda, in turn, could then have the new fire power and backing to turn its attention to fully address the rise of the hard discounters.
Whatever happens there will be ramifications on the wider supply base. How far you are affected will probably lie in the scale, size and nature of your business.
There might now be a waiting game to find out just what Sainsbury’s will be allowed to do to get the deal over the line. But if you want to be part of it then now is the time to be looking at your own business and working out what steps and measures you need to take in order to be relevant to whatever new Sainsbury’s-Asda company emerges.