Merging on the ridiculous for supermarket suppliers

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The merger of two of the UK’s biggest supermarkets threatens the competitiveness of the groceries supply chain. Tom Wills explains that without regulation that abusive behaviour of a shrinking group of powerful retailers could push small suppliers out of business. The Competition and Markets Authority should assess this merger based on its wider economic impact, including on suppliers.

The planned merger between Sainsbury’s and Asda would create the largest supermarket group in the UK, controlling more than 30% of the groceries retail market. The CEOs insist that the supermarkets will retain their separate brand identities, and that there will be little impact on jobs or consumer experience. The key difference for shoppers, according to the PR surrounding the announcement, is that the new supermarket group will be able to cut shelf prices on food products by 10%.    

Unless these savings are going to be found by cutting shareholder dividends (clue: they won’t), then it’s clear that the supermarkets are hoping that their combined heft will mean that they can demand lower prices from their supply chain.

This is concerning for the suppliers that rely on the custom of UK supermarkets – a huge number of businesses ranging from dairy farmers in Devon to asparagus growers in Peru.  

These suppliers are often already working to extremely tight margins, with little scope for finding extra savings. Analysts Plimsoll have observed that “anymore downward pressure on supplier prices will make it incredibly tough for food suppliers – ultimately costing jobs in the long run”, while the New Economics Foundation conservatively estimates 2500 job losses in the supply chain. Jobs are not the only area where a food business might try to find savings either – food safety and quality, as well as labour rights, are also liable to be compromised if suppliers are pushed to the edge of financial survival.

This merger also presents acute competition problems. It means that a food business selling to the UK market will have fewer potential customers and a weaker negotiating position. This concentration of ‘buyer power’ means that they are less able to reject bad terms of trade by playing buyers off against each other to secure a better price. The structure of the groceries retail market is already weighed in favour of big supermarket buyers and will become even trickier for suppliers if 60% of the market is controlled by just two chains (Tesco and the new Sainsbury’s-Asda behemoth).

Occupying a position of such power relative to their suppliers means that supermarkets are able to get away with ethically dubious behaviour such as paying invoices late, cancelling orders at the last minute or demanding spurious fees from their suppliers. The Groceries Code Adjudicator was established to tackle these practices, but it is hobbled by the fact that its remit only applies to direct suppliers to supermarkets. Suppliers subjected to unfair purchasing practices will often simply pass the costs onto their own suppliers, who have no one to complain to – this blog explains the problem in more depth. It is entirely likely that without regulation, the abusive behaviour of a shrinking group of increasingly powerful retailers will push large numbers of smaller suppliers throughout the supply chain out of business as they will be unable to afford the risk of dealing with supermarkets.

Smaller suppliers around the world being forced out of business would mean lost livelihoods, but also a direct impact on the UK consumer. A less competitive and vibrant supplier sector would leave the remaining suppliers with less incentive to innovate and economise, ultimately meaning less choice and quality for consumers. This concern has already been raised by the National Farmers’ Union.

So, what should the Competition and Markets Authority (CMA) do about this looming mega-merger? As a body set up to protect the interests of consumers, it should heed the arguments presented above and stop the merger from going ahead.

If the CMA does choose to approve the merger, then it must at least recommend that a mechanism is introduced to protect the majority of suppliers from unfair trading practices – not just the small proportion of direct suppliers currently protected by the Groceries Code Adjudicator. This is a critical decision for the UK economy and it is vital that the CMA has a full picture of the impact that this merger would have. To that end, a good first step would be to conduct a comprehensive study of suppliers to the UK market as part of the CMA’s investigation.

The Sainsbury’s-Asda case demonstrates that, when it comes to food, power is being concentrated into fewer and fewer hands. The absolute minimum response is for a powerful regulator to be introduced to which farmers and food businesses can appeal when they feel that the structure of the supply chain is leaving them exposed to abuse.

Traidcraft Exchange has written to the CMA to express our concerns and call for a full survey of suppliers to ensure that their decision on the Sainsbury’s-Asda merger takes into account fairness and competition in the supply chain – read the full letter here.

Tom Wills is a Policy Advisor with Traidcraft Exchange.