(Bloomberg Businessweek) -- In recent weeks, executives from Nestle SA and Unilever—Europe’s biggest food companies—have groused that retailers are squeezing them ever harder on prices, slashing the premiums they’ve grown accustomed to. Their problems just got a lot bigger.
On Monday, J Sainsbury Plc announced it had offered $10 billion for Asda, the British unit of Walmart Inc. Sainsbury said the deal would forge a U.K. supermarket leader that could harness the American retail giant’s purchasing strength to trim prices of essential items by 10 percent.
That promise to consumers escalates a pricing battle that has already emptied store shelves in some countries of popular products like Maggi seasonings, Buitoni frozen pizza, and Marmite spread. Nestle reported a drop in European prices in the first quarter, signaling a return to the deflation it’s had to cope with recently.
“The retail environment in Europe is only going to get more competitive, which likely means tough negotiations” for consumer-goods producers, said Kepler Cheuvreux analyst Jon Cox.
The Sainsbury deal follows a purchasing tie-up in France between grocers Casino Guichard Perrachon SA and Auchan, which prompted rivals Carrefour SA and Systeme U to say last week that they had begun talks on a similar arrangement. U.K. supermarket leader Tesco Plc has acquired wholesaler Booker, which supplies thousands of convenience stores, to extend its reach. Two years ago, Dutch grocer Ahold combined with Belgium’s Delhaize.
“It’s not unreasonable for us to look at the buying terms of both businesses and to ask for the lowest price and pass that back to our customers,” Sainsbury Chief Executive Officer Mike Coupe said on a call with reporters. Big food companies “make spectacular returns on equity and are very, very profitable,” he added in a briefing.
Coupe, who was caught singing “We’re in the Money” by a hot microphone Monday as he prepared for a television interview, portrayed the deal as a boon for consumers. Some U.K. politicians think otherwise. Alarmed at the prospect two companies—Sainsbury and Tesco—jointly controlling 60 percent of the market, they’ve called for a thorough antitrust review. After a nearly 15 percent jump Monday, Sainsbury shares rose a further 1.3 percent early Tuesday in London.
https://www.youtube.com/watch?v=7zYJqX8x-Io
Nestle has been locked in a standoff with Agecore, a supermarket purchasing group that includes Germany’s Edeka, Colruyt in Belgium, and Coop in Switzerland. The alliance represents a tenth of the food producer’s sales, according to Zuercher Kantonalbank.
The dispute has led Coop to remove Maggi seasonings and Thomy mayonnaise—among Nestle’s most iconic Swiss products—from store shelves in the company’s home market. A 2016 skirmish in the U.K., inflamed by the Brexit-weakened pound’s pressure on sourcing costs, led Tesco to suspend sales of Unilever’s Marmite yeast extract.
While Coupe and other supermarket executives are talking tough on pricing, suppliers say they won’t back down. “This is not the time for one-sided concessions,” Nestle CEO Mark Schneider said about negotiations with Agecore on a recent conference call.
Grocers say they have to rein in costs as consumers defect to online interlopers such as Amazon.com Inc. and to discounters like Germany’s Lidl and Aldi. Since the financial crisis, the German companies have risen from almost nowhere to gain more than 12 percent of the U.K.’s grocery market, according to researcher Kantar Worldpanel.
While Lidl and Aldi keep a lid on prices by placing gargantuan orders for relatively few items, Sainsbury says it can tap Walmart’s global heft to achieve similar benefits of scale. The U.S. retailer will keep a 42 percent stake in the merged company, which includes a previous Sainsbury acquisition, general-merchandise retailer Argos. Sainsbury says it expects to reap 500 million pounds ($690 million) of synergies from the deal.
“There’s strength in numbers,” said Laith Khalaf, an analyst at Hargreaves Lansdown. “The prospect of Sainsbury, Asda, and Argos working together, with Walmart chipping in too, is a pretty powerful combination.”
With their huge scale, Nestle and Unilever can still command something of a premium as they snap up emerging brands offering vegan, gluten-free and other trendy foods. Smaller producers have more to lose, and shares of U.K. grocery suppliers slumped after the Sainsbury announcement.
Greencore Group Plc, a maker of prepared sandwiches that gets about a quarter of its sales from Sainsbury and Walmart, was down as much as 3.6 percent. Premier Foods, which produces cakes, cookies, and prepared meals, fell as much as 2.1 percent.
“Suppliers will be quite nervous that retailers are joining forces,” said Bryan Roberts, an analyst at TCC Global. “There is no such thing as an easy grocery market.”
--With assistance from Corinne Gretler .
To contact the authors of this story: Thomas Mulier in Geneva at tmulier@bloomberg.net, Sam Chambers in London at schambers7@bloomberg.net.
To contact the editor responsible for this story: David Rocks at drocks1@bloomberg.net, Eric Pfanner
©2018 Bloomberg L.P.
