A Coupe d’etat Mike...now for the scrutiny
WHEN Mike Coupe took over as boss of Sainsbury’s from his effervescent predecessor, Justin King, he seemed a steady, safe pair of hands rather than one for letting off fireworks. How wrong that has turned out to be.
His merger with Asda is a move that is stunning in its audacity, and one that undeniably involves major risks.
The biggest single risk, from the protagonists’ point of view, is that the Competition and Markets Authority will issue a veto, or slap on such onerous conditions it is no longer worth doing.
Both sides are going into this with their eyes open. Teams at Sainsbury’s and Asda have been working for months to figure out whether it is feasible for them to clear the competition hurdles. They have concluded that it is.
The argument is basically that the competition landscape has changed so dramatically the old rules no longer apply. Shoppers no longer display loyalty to one supermarket brand, they no longer necessarily do one big weekly shop, but flit between online and physical stores.
The big four supermarkets, the thesis runs, no longer merely face competition from each other, but from German discounters, from Amazon, from food delivery services such as Just Eat and from niche online retailers.
The rise of internet retail means that barriers to entry for smaller competitors are now low, so the new Sainsbury’s-Asda (Asbury’s? Sasda?) will not be in a position to exploit its pricing power at the expense of consumers.
The regulator assessed Tesco’s takeover of Booker on the basis of local competition, not a crude national measure and is expected to take the same approach.
All the clever arguments in the world, however, are not the same thing as actually getting a green light from the CMA.
Its new chairman, Andrew Tyrie, is a tough customer who took a hard line on bankers and proved himself a doughty consumer champion whilst heading the Treasury Select Committee. He won’t tolerate any nonsense.
It’s worth remembering, too, that despite the emergence of new rivals, Sainsbury’s-Asda and Tesco will be a dominant duo, between them commanding around 60 per cent of the market. That’s not to be sniffed at, even with online operators snapping at their heels.
Mike Coupe is naturally encountering some disbelief as he strives to convince shoppers bigger is better.
His promise to deliver price cuts of 10 per cent on a basket of as yet unspecified everyday items is impossible to test at this stage.
No doubt he is sincere – Sainsbury’s recently spent £150 million on cutting prices – but he is leaving it deliberately vague because all kinds of factors come into play, including Brexit, commodity prices, the weather and the behaviour of rivals. All true, but nonetheless frustrating for consumers who would like firm pledges. As for suppliers, the central case is that it won’t be small ones who get hurt, only the multinationals who are making fat profits anyway.
It’s true that supermarkets struggle to cover their cost of capital and make much lower margins than the big branded manufacturers.
But persuading the likes of Unilever to surrender some of those margins so shoppers at Asda and Sainsbury’s can enjoy cheaper prices is a tall order.
Coupe might manage to negotiate better deals on everyday items but the manufacturers will be seeking to make up the ground on other products, so prices might rise elsewhere.
There may be other benefits to teaming up – Sainsbury’s will gain access to Walmart and Asda’s technology research, for one.
Yet there are enormous challenges in an integration of this size: culture, IT, regulation – not to mention that competitors can take advantage of the fact senior management at Sainsbury’s and Asda will be distracted by the deal for a year or so.
Coupe says he is happy to be judged in the court of public opinion – and he will be.
His every move from here on in will come under scrutiny, and if he gets it wrong, that judgment will be swift and merciless.
Persuading the likes of Unilever to surrender margins for cheaper prices is a tall order