Sainsbury’s hunts £500m in efficiencies with Asda merger and the impact on the ad industry could be huge

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Sainsbury's and Asda have agreed to merge to create a grocery powerhouse that will rival Tesco’s dominance of the market. Plans to retain both brands are firm, though it will in time look to reduce ad spend as part of a £500m efficiencies drive that could have a wide-reaching impact on the ad industry.

The merger is pending regulatory approval from the Competition and Markets Authority (CMA). On a press call to outline the early details of how the combined entity will operate, Sainsbury’s chief executive Mike Coupe was bullish it would be granted without problems – with the brands already having "done a huge amount of work with the CMA” – and lead to the deal being finalised in the second half of next year.

The two companies confirmed plans to retain both brands, which “co-exist” with their own separate management teams. Walmart will retain a 42% stake in Asda with Coupe poised to lead the enlarged business; Asda will continue to be run by its own chief executive, Roger Burnley, from its Leeds headquarters.

Coupe said the vision is that Asda will join Argos to become part of the "Sainsbury’s family of brands.”

His supermarket has promised that the tie-up will lead to a reduction in the price of products on shelves across both Asda and Sainsbury’s by 10% to better compete with the likes of Lidl and Aldi.

To get there, it has committed to finding “synergies” that would deliver £500m in cost savings.

Its own agency roster

One area of savings will come from "operational synergies” including marketing and advertising expenditure. The chief executive repeatedly pointed to its acquisition of Argos as a template for how this might work where it saved around £70m from merging certain operations. But history has not shown it to be that simple.

After acquiring Argos, Sainsbury’s put its £63m media business up for review with the view of moving it from long-term partner PHD to M/Six, the media agency within The&Partnership that also manages Argos’ £53m advertising spend.

However, Omnicom-owned PHD claimed the review had been run unfairly and, after making a complaint to the board and a lengthy second review, the account eventually stayed with PHD.

Sainsbury’s creative account currently resides with Wieden+Kennedy London after it was moved out of agency partner of 40 years AMV BBDO in 2016. On Friday, it was announced that AMV BBDO (an Omnicom agency) had won Asda’s creative advertising business following a surprise review that kicked off in January.

After details of the merger were leaked, it wasn’t long before connections were drawn between AMV’s history with Sainsbury’s and its appointment to lead Asda’s “agency ecosystem”.

But The Drum understands the agencies pitching for Asda the business were not informed of the intention to merge the supermarket into Sainsbury’s.

But, sources have suggested that Asda’s chief marketing officer Andy Murray is one of a small group of people that had knowledge of the deal, indicating that how the brand is marketed moving forward is of paramount concern.

Sainsbury’s Coupe stressed that both would retain their individual identities and comms strategies, and the deal would allow each to “sharpen” their brands. For Asda this has meant talking up its value message while Sainsbury’s has sought to talk about quality through the ‘Live Well for Less’ lens.

“There’s a real opportunity here from a brand and comms perspective,” said Catherine Shuttleworth, retail analyst and chief executive at shopper agency Savvy.

“Both Asda and Sainsbury’s have been forced to compete right in the middle of an overcrowded grocery market, advertising to everyone about everything from value to organic and clothing to charity tie ups. This merger could allow the brands to focus on what they are best at, reverting to their true DNA.”

FMCG's will be hit (and so too will the ad industry)

It's arguably too soon to talk about brand marketing moving forward, as it was stressed that, until the CMA approves the deal, both will be “fierce competitors” for the next 18 months. A more pressing concern will be the impact this has on suppliers.

By far the biggest savings from the merger would come from exercising their combined buying power; 85% of the products each supermarket sells come from just 100 suppliers – “so it’s not unreasonable to ask for the lowest possible buying price from these very large multinational businesses,” said Coupe.

This will inevitably hit the likes of Unilever and P&G the hardest.

“Sainsbury's are using the massive power of Walmart to squeeze suppliers," said Rob Sellers, managing director at Grey Shopper.

"The big brand owners are going to be affected by this sooner rather than later. These FMCG companies have already been though a lot with Brexit and Tesco renegotiating supplier contracts. This is another wave of disruption into the way they traditionally worked.

"The interesting thing will be how long the suppliers realise it isn’t sustainable and look at new models to take back some of that control. At some point that will mean strategic change and operational change for those at the brunt of the commercial squeeze – and that’s the brand owners.”

This will ultimately have far wider implications for the advertising sector than just the roster of Sainsbury’s and Asda agencies. Already two of the biggest FMCG suppliers have overhauled their operations to the industry's detriment as they hunt profit at a time of slow growth.

Unilever – the owner of Persil, Dove and Hellman’s – has slashed the number of agencies it works with and brought a number of elements of its marketing mix in-house as part of a massive cost savings exercise.

Meanwhile, P&G – which counts Ariel and Crest among its household brands – will have cut its agency roster by 50% by the close of 2018 and has set up an unprecedented model as it look for more value from its reduced spend.

It's no coincidence that shares in WPP, Publicis, Omnicom and Interpublic Group have all fallen in tandem with such moves from FMCG companies. And this this latest shake-up in the retail sector won't provide much comfort that things will get better soon.

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