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db reader: It’s only a matter of time before the next supermarket megamerger

Mark Cranstoun, partner at consultancy Total Negotiation and who has worked for brands such as Mars and Diageo, explains that while the Sainsbury’s/Asda merger was blocked, suppliers should still be prepared for a supermarket megamerger.

When the Competition and Markets Authority closed the lid on Sainsbury’s proposed merger with Asda, CEO Mike Coupe was probably not the only one feeling deep frustration. Suppliers will no doubt be reeling too, albeit alongside some sighs of relief. Immense preparations and budgeting to get ready for a deal that is now dead has left many asking, “was that really all for nothing?”

Well, no it wasn’t, as it is only a matter of time before the next industry consolidation deal comes along. Next time it may well go through and the suppliers’ opportunity now is to capitalise on that preparation and implement changes to remove or reduce risk.

But won’t a different deal bring a new set of circumstances? Partly true, but while every potential deal will of course have its own nuances in terms of supplier impact, the principles are fundamentally the same. All large supplier conglomerates selling multiple lines to the merging parties will face significant risk and complex renegotiations.

Preparedness, and the ability to take a proactive negotiation position with the merging customers, will make a potentially huge difference to the outcomes achieved and the deals that are struck. This preparation shouldn’t just be viewed as ‘survival’; it should be about the supplier using the merger as an opportunity to improve its future position with the new customer.

Suppliers hold cards (and data) too

Obviously, the supplier’s key concern in merger situations is that two sets of confidential customer pricing data suddenly become one. Inevitably, the merged customer entity gaining inside knowledge of the competitiveness of a supplier’s pricing will spark demands for new pricing structures with the retailer looking to drive best of best terms.

However, retailers don’t hold all the cards and suppliers should take a bold stance rather than a defensive one. At the heart of this is the opportunity for suppliers to use their own data as the basis for negotiation. There are of course many reasons behind apparent price differences, whether due to volumes sold, scale of purchasing, positioning of products or offset discounts. Suppliers often don’t use this intelligence as much as they could do, to scenario plan and highlight which product lines pose the biggest opportunities and threats in future market consolidations. Scenario planning possible mergers is a necessity to reduce the risk.

The Competition and Markets Authority (CMA) blocked the proposed Sainsbury/Asda merger in April this year.

Preparation is critical

Grocery suppliers can do several things to prepare for downstream M&A more effectively. Firstly, it is vital to have clear and structured trading terms in place. Whilst this sounds an obvious point it seems increasingly rare with many businesses not having the appetite to implement or keep their terms alive. Although the cost of fully resetting and implementing new trading terms across all products and customers can be prohibitive, the risks of putting this task off can significantly weaken a supplier’s negotiating position in a customer merger situation. 

When a potential merger is on the cards, suppliers must also be clear about the main differential pricing risks that exist across their entire portfolio. This is something proactive suppliers should always be reviewing, to minimise risk and stay ahead of the game. Considering it can take several years to optimise, suppliers should be continually risk managing to mitigate future issues triggered by mergers.

The right negotiation stance

A supplier must also consider its best negotiation position. This covers both how, and with whom, negotiation takes place within the newly formed customer. The typical multiple account management lines of a supplier-customer relationship may encourage a tendency for disparate negotiations at product and brand level. While this approach suits everyday negotiations, it may not be best for a merger. Suppliers need to make a positive decision about who and what level they want their negotiator to be. The customer will be surveying its supplier relationships holistically and it will be beneficial for the supplier to prepare a comparative ‘high-level’ negotiation position too.

Taking this higher position will help suppliers counter-argue price demands from the customer but requires the supplier to have a top down view of the price competitiveness of all lines. Deciding on a favoured negotiating position in advance based on the performance of SKUs, brands, categories or overall spend is critical.

Key data questions

It is key that customers start their preparation with a deep dive on:

  • Understanding the full financial exposure created from various customers merging
  • Being clear on what their ‘price’ consists of – there is a lot more to consider than just invoice prices
  • The opportunities surrounding what they should ask for in return

Big mergers are usually well publicised in advance of the deal being done – this affords suppliers precious planning time. A customer merger is a business-wide problem that needs multifunctional alignment and that starts with detailed planning and analysis.

The power of sound commercial skills to achieve the right conclusion shouldn’t be underestimated. With each supplier being one of many vying for a strong deal with the newly formed customer, the differential between one supplier’s ability to negotiate and those of its competitors will also impact the quality of the respective deals agreed. A supplier isn’t just fighting for the best they can get for themselves; they’re also fighting for how much better they can make their deal than the competition’s.

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