The latest news that Boots and Sainsbury’s intend to combine forces as a viable challenge to Tesco and Asda sets several interesting precedents for suppliers. In a 6-store trial starting early 2002, 10,000 Boots products will be available in Sainsbury’s outlets for 9 months as both companies explore a new type of working relationship. Apart from this intriguing mix of pharmacist and grocer cultures, and the obvious problem of two major players in radically different channels sharing prices/terms information, the principle of retailers co-operating in this way raises a number of issues for their supplier partners.

A positive gain for suppliers will be the catalyst effect of precipitating a fundamental review of channel policy. Whilst this move could be seen as proof that channel differences have finally broken down in many categories, there remains a need for suppliers to attempt to differentiate the available routes to the consumer, assess the function of each, set key performance indicators and reward channel members appropriately. This process helps in minimising inter-channel leakage, whilst optimising the performance of trade partners. In the Boots/Sainsbury’s case, this means a ‘retrospective’ comparison of prices/terms in order to anticipate and manage a call for clarification.

However, the important question is where this type of relationship will lead. Is this in fact the beginnings of an elaborate courtship process which could result in a full merger, probably one of the most complementary pairings in the UK retail market? If the relationship goes to full term, it will mean a fundamental shift in the balance of the customer base for most suppliers. This means that the new combination will need to be re-classified as invest, maintain or divest. In the meantime, it would be wise to conduct a ‘what if’ on the three possible scenarios, the Boots or Sainsbury’s culture predominating or the combination producing a hybrid alternative. Either way, the inevitable management cull will result in a fundamental change in the decision-making-process, a new value system, and a new way of facing the supplier, all requiring a major shift in the supplier’s contact network and organisation structure.

For H&B suppliers, the move represents an opportunity to gain additional distribution with incremental sales, unless their categories are operating in a zero-sum game, with sales gained at the expense of other channel members, who may resort to price-based retaliation. Private label may pose a problem in terms of consumer confusion until the partners decide upon a way of communicating and rationalising the presence of Boots labels within a Sainsbury’s outlet. And this before the issue of brand/own-label balance is settled!

As both companies explore the options, it may occur to someone that the migration of appropriate products from Sainsbury’s to Boots might represent additional benefits, in which case specialist food suppliers could gain additional (incremental?) access to the High Street, in a radically different shopping environment with the inevitable impact upon category dynamics and prices/terms. The space-management specialists may have already anticipated the problem of ‘fitting’ 10,000 additional lines into a 17,000 line environment but, again, advances in service level and continuous replenishment process may have anticipated the situation by freeing up some of the necessary space. However, both retailers will have an interest in moving the combined offering upmarket, resulting in significant line-pruning. A review of sensitive categories by appropriate suppliers might be in order.

For suppliers, this retail combination would change the fundamental dynamics within the account management process. This means re-examining potential in terms of market share, repositioning within the customer life-cycle, re-assessing partnership in terms of strategic alignment, relationship possibility, cultural fit and consumer match. As a result, it raises the stakes in terms of relative competitive advantage within the account. This change demands a careful comparison of share of sales versus profit to ensure an appropriate reward for effort. In effect, Sainsbury’s/Boots would be a new customer with a combined market capitalisation, before synergies, of £14bn – larger than most – but still £2bn short of Tesco’s current market value.............

Date article published: 10/08/2001

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