Plimsoll warns Sainsbury Asda deal could cost thousands of jobs

Business analysts at Plimsoll Publishing have warned that the proposed merger of supermarket giants Sainsbury’s and Asda is likely to cost thousands of jobs as supplier businesses go to the wall or become victims of takeover as a result of increased pressure on margins.

The analysis comes as Britain’s competition regulator, the Competition and Markets Authority (CMA), recently invited all interested parties in the proposed deal to combine Sainsbury’s with Walmart’s Asda to comment on the impact of the deal. Interested parties have until June 4^th to respond to the call, which forms part of the CMA’s information-gathering process in advance of a formal investigation starting.

Of the UK’s 500 largest Food Manufacturers analysed by Plimsoll’s expert team, 125 are already considered ‘in danger’ according to the company’s unique and independent financial modelling – also known as the Plimsoll model. A further 73 are marked as ‘loss making’ and in a vulnerable position. While average profit margins in the sector are sitting at a fairly healthy 4%, Plimsoll believe some food manufacturers will not be financially robust to withstand a shake-up of this magnitude in the grocery retail sector.

When the deal was announced, Sainsbury’s boss Mike Coupe pledged to cut prices on everyday products by around 10%. He said the merger with Asda would deliver at least £500m in cost savings and other benefits, largely as a result of improved efficiency and better deals with suppliers.

But Plimsoll’s senior analyst, David Pattison commented, “Improved efficiencies may be one area of cost savings for the newly combined Sainsbury’s and Asda, but anymore downward pressure on supplier prices will make it incredibly tough for food suppliers – ultimately costing jobs in the long run.

“If the deal goes ahead I can see a period of acquisitions, takeovers and mergers as supermarket suppliers fight for survival, in a race to the bottom on price.”

Many food suppliers are already having to adapt to higher costs from auto-enrolment pensions and the Living Wage, as well as the weaker Pound since the Brexit vote. Further hampered by competition on price following the potential merger, increased numbers of food manufacturers can be expected to consider selling out. Of the 500 leading food manufacturers recently analysed by Plimsoll, 161 were already deemed prime for acquisition.

Continued Pattison, “In many cases, these companies have a good gross margin but Plimsoll’s assessment shows their financial health isn’t what it could be. With some restructuring post acquisition, these businesses could offer potential acquirers profitable additions to their portfolio.

“Acquiring companies will look to economies of scale and it should be expected that they will shed jobs as they look for efficiency gains. Mergers like this and the consolidation of the competition also make life very difficult for surviving smaller suppliers,” he said.

“The industry as a whole is going to be forced to tighten its belt and suppliers will be looking to scratch increased margins from wherever possible. Doing business will become harder as more stringent financial controls are introduced in an effort to reduce exposure from both suppliers and customers going bust and it is the small supplier who will suffer most.”

“Ultimately, the consumer might well end up paying the price as a consequence of this merger with less consumer choice or lower quality products,” Pattison said.