The Competition and Markets Authority (CMA) recently announced that no new merger talks would be allowed between Asda and Sainsbury’s for at least ten years. This is the longest merger ban to be imposed in living memory and suppliers need to be careful it doesn’t create apathy. I am already seeing suppliers stop working on reducing or removing significant price or investment exposure since the deal was quashed; this has risky implications.
Suppliers must be both prepared and equipped to manage any future market changes. To do this their commercial leaders must urgently take more pro-active steps rather than reducing their efforts. It is only a matter of time before the next industry consolidation happens and burying heads in the sand now will again cause major disruption. Considering Walmart’s ambitions and Sainsbury’s falling market share and confused business model, it is unthinkable these brands will exist in the form they do today in two to three years. There will be either be new suitors, mergers or alliances that will lead to equally turbulent times. Suppliers need to be constantly vigilant.
Rather than view this as a time to relax, now is the time to capitalise on the preparations made and extend this to all customers no matter how small. I’m constantly amazed at the significant exposures caused even by small volumes in small customers. A supplier’s readiness will determine how agile and proactive they can be in inevitable negotiations to come. Suppliers that continue to implement improvements in their business will be able to reap greater rewards when the next inevitable consolidation comes along.
While it is true that a deal between other merging organisations would bring a fresh set of circumstances, the principles of all deals are fundamentally the same. Significant threats and complex renegotiations are inevitable, especially for large suppliers selling many lines to major retailers. Future deals are also likely change the dynamics of the market, bringing different challenges to the supplier. Consider the likelihood of Amazon becoming a top five grocery customer well within the next decade. When this happens, it will mean a new type of customer to contend with and no-one afford to rest on their laurels.
Taking a bold stance is critical
Clearly a supplier’s major concern in a merger environment is two customers having the ability to compare cost prices. It’s inevitable the customers will gain useful intelligence regarding the competitiveness of each suppliers’ terms. This is likely to trigger new pricing and investment structure demands as the customer seeks the best of best terms.
It is critical to be clear on the desired outcome of discussions and this is also appreciated by retailers. The supplier must use strong data insights to be ready for negotiation. It needs to justify its reasons for price differences, whether these are down to volumes and scale, product position, offset discounts, or other activation factors. It is the perfect opportunity, while the merger market is temporarily quiet, to spend time on data analysis and scenario planning. This should include pinpointing which product lines pose the biggest opportunities and threats in future market consolidations and planning action to leverage and mitigate.
Review terms and pricing while pressure is low
Now is also the right time for suppliers to ensure they have clear and structured trading terms in place. It is surprisingly common for this be overlooked, especially when mergers and evolving customer relationships lead to terms that were once clear becoming highly ambiguous. It is, of course, a major project to take on, but far better to do so while active and time-demanding customer negotiations are not in play. The cost of fully resetting and implementing new trading terms across all products and customers can seem prohibitive. However, the risks of not doing so are significantly more, and weaken a supplier’s future negotiating position.
It is also critical suppliers gain clarity over the key differential pricing risks across their portfolio. This should be under constant review to ensure minimal damage and that no further exposure is created. This can take years to optimise across a complex product portfolio, so again it should be business as usual.
Turning relief into readiness
The relief many suppliers will be feeling over the ban now placed on a future Asda and Sainsbury’s merger puts them at risk of sleepwalking into future customer consolidations. Both retailers will seek other ways to follow their ambitions and they will most certainly find viable alternatives.
Preparation is critical and now is the time to build upon the work done to be as ready as possible for the next strike. Large scale mergers are well publicised in advance of the deal, allowing suppliers precious planning time. However, a good 90% of the work required involves the supplier getting their house in order and ensuring the negotiation capability is always ‘merger-class’.
