Twilight of the retail giants leaves farmers vulnerable

THE PROPOSED merger between Asda and Sainsbury’s is likely to be a watershed, with significant consequences for consumers, employees, the city of Leeds, high streets across the country, suppliers and farmers.

It is, perhaps, the end of an epoch which began in 1964. That year, an old friend of mine, the late Noel Stockdale, chairman of Associated Dairies, a small public company based in Leeds, opened Britain’s first genuine supermarket in Nottingham. That company became Asda.

Today, all the major supermarkets have hit the buffers. For 50 years they have been growing dramatically, at the expense of independent shops, by creating vast new out-of-town outlets, with up to 30 per cent of the footage allocated to non-food items.

For most of that time, sales increased at a giddy pace, but 25 years ago two lowcost German discounters entered the market. The supermarkets responded with a vicious price war, leading with milk, and the long-established doorstep milk service was the main victim. Today that service is virtually non-existent.

However the discounters were held at bay and the big retailers – Tesco, Sainsbury’s, Asda, Morrisons and Safeway – continued to expand rapidly.

The arrival of the internet changed all that, with the supermarkets responding by offering a home-delivery service which has proved very costly. Gradually supermarkets increased their margins to cover increased costs. The two rejuvenated discounters, Aldi and Lidl, saw their opportunity.

The first casualty was the market leader Tesco, which had also invested heavily in difficult overseas markets, including the US. Tesco has had a torrid time over the past four years.

Asda and Sainsbury’s have also been suffering, with Asda losing both market share and profitability. The purpose of the proposed merger is to stop the slide, by cutting prices and costs, with Walmart, owners of Asda, effectively withdrawing from the market.

The competition authorities are bound to be interested in the deal because of its size – the two together would have over 30 per cent of the food retail market, bigger than Tesco.

Over a decade ago, Morrisons proposed to buy the fifth-biggest retail player, Safeway, and were obliged to dispose of a number of stores where the continued share of local markets was deemed excessive. But the national share of these two companies was less than 20 per cent.

However, the remit of the competition bodies is purely to protect customers, and, on that test, this deal would probably pass, offering reduced prices and little reduction in choice. Asda’s strength is in the North, whereas Sainsbury’s is dominant in the South.

The employees of both companies have been told that no stores will be shut as a result of the merger, which I find surprising. Perhaps the competition authorities will do the dirty work for them, by insisting on some sell-offs, but are there willing buyers?

However, both companies have massive head office buildings – Sainsbury’s in central London, Asda in Leeds. This is where, I suspect substantive savings can be achieved through integrated buying teams and joint administration.

In the Morrisons acquisition of Safeways, there was no doubt that Bradford would become the HQ of the new business, but in this merger Sainsbury’s is the bigger partner. The Competition Authority could give the Yorkshire economy and devolution a powerful shot in the arm if it insisted that the new company made its HQ in Leeds. But I fear that Leeds may suffer to the benefit, yet again, of London.

A further price squeeze will put even more pressure on the dwindling independent food retail food sector, but at the other end of the market Marks & Spencer might benefit if price reduction takes precedence over quality among their competitors.

The supply chain of the two retailers seems likely to be the main loser – Mike Coupe from Sainsbury’s, the prospective chief executive of the new company, has already suggested that better buying – lower prices – will be a key justification of the deal to the two shareholders.

These reductions will mainly take place in the private label sector, where the retailers can rearrange their sourcing into fewer but bigger companies. Those who survive will be guaranteed higher volumes in return for reduced margins. Other, smaller suppliers will be at risk.

Which leaves the farmers – small, independent and vulnerable. The dairy farmers have suffered grievously from supermarket price wars over the years, because of their limited clout. This situation will be exacerbated by the deal.

So here is a radical option. Although I am a strong believer that the UK should remain in the EU, I am reluctantly coming to the conclusion that a modest withdrawal will be inevitable. Twenty-five years ago, the EU declared that the Milk Marketing Boards (MMB) of the United Kingdom, which were a legal monopoly run by the farmers, were unacceptable in the Common Market, and were accordingly disbanded. Would it not be possible, post-Brexit, to reintroduce the Milk Boards? They would have to be properly regulated (an OfMilk?), to ensure no abuse but could then negotiate fair prices for all their farmers, by pooling the income they received from all the different milk markets. Monopolies are always a concern, but when I was running Northern Foods, I found the MMB a fair and efficient supplier. For example, they could rationalise the collection of milk from farmers.

This deal will probably go through eventually, if the consumer remains king, as has been the case for the past half century. But, at some stage, the concept that size for size’s sake becomes unmanageable and unacceptable to society. We may nearly have reached that point.