Supermarket chief needs to change his tune

Modern Mogul  
Sainsbury’s boss Mike Coupe will not have opened many emails more devastating than the one he received from Linklaters last Tuesday evening. His advisers at the law firm relayed the news that the competition watchdog had, in effect, killed Sainsbury’s £14bn merger with Asda — the centrepiece of Coupe’s business strategy and the focus of the companies’ attention for more than a year.
Coupe, chairman David Tyler and a handful of shocked colleagues, hunkered down in a room at Sainsbury’s London headquarters to try to make sense of a verdict so severe that they had not seriously countenanced its possibility.
The Competition & Markets Authority (CMA) indicated that to stop the combined companies abusing their power, they would have to sell more than 300 stores to a single buyer with a proven online offering, and potentially dispose of the Sainsbury’s or Asda brand entirely.
After working till midnight, the executives decided to go on the attack. The usually unflappable Coupe was booked for a BBC Radio 4 interview at 7am, soon after the CMA hammer blow was made public.
Coupe became synonymous with a deal that drew the ire of suppliers and politicians when he was caught on camera singing “We’re in the money” last April. On Wednesday morning, his voice was shot through with frustration.
“The CMA have fundamentally moved the goalposts, changed the shape of the ball and chosen a different playing field,” he told the BBC. “Who would invest in this country? This is just outrageous.”
Coupe vowed to fight on, but there is little chance of the CMA backing down, having dismantled the merger with a ferocity few in the City had expected. Sainsbury’s share price sank 17% on the day, leaving the chief executive and the rest of the board bruised, battered — and contemplating where to go from here.
The humiliating turn of events could set in motion a fundamental reshaping of the £190bn grocery industry, putting Sainsbury’s into play and leaving Asda’s American owner, Walmart, looking for another way to extract itself, possibly through a deal with private equity.
Sainsbury’s sales have started going backwards — they fell 1.1% over Christmas — and its stretched finances offer limited room for manoeuvre. At 234p, the shares value the business at £5.2bn. When former boss Justin King left in 2014, before its £1.4bn takeover of catalogue retailer Argos, it was worth £7.1bn.
“Sainsbury’s is doing lots of grumbling . . . but this is almost certainly a waste of time and money,” said one of the chain’s top 10 shareholders. “If anything, the competitive landscape has got more competitive. Sainsbury’s continues to lose market share, and has now blown money and credibility on this merger.”
An industry source said: “Sainsbury’s has got to get back on its feet. The business is perfectly sustainable, it’s not go–ing to crumble and disappear, but there is a risk they will get psyched out and start thinking the situation is irretrievable.”
At an emergency board meeting on Wednesday, Coupe is said to have received unanimous support. The next meeting will be chaired by Martin Scicluna, also chairman of the insurer RSA, who is replacing Tyler at a critical juncture in the chain’s 150-year history.
Sainsbury’s evidence to the CMA showed that the Asda deal was conceived from a position of weakness — an awkward union of a company desperate for scale with one whose owner, Walmart, was eager to sell. Coupe is fond of saying that Sainsbury’s values make it different — a lofty ideal at odds with Asda’s singular focus on low prices — but the more natural merger partners for Sainbury’s, such as Waitrose and the Co-op, were unavailable due to their ownership structures.
When the CMA gave the green light to a merger of the bookmakers Ladbrokes and Coral, then to that of Tesco and Booker, Coupe inferred that the rule book had been rewritten and pushed ahead with the Asda deal.
“When Mike’s saying the CMA have changed the rules and changed the shape of the ball, in reality, it’s the same rules and the same ball. Sainsbury’s and Asda just misread some of the CMA process, its models and approaches. I’m surprised they were so surprised,” a senior retail source said.
Independent observers have questioned the suitability of those models and approaches — as well as the watchdog’s contention that “Sainsda” would lead to higher prices for customers.
“With [the discounters] Aldi and Lidl so prevalent in the market, it would be commercial suicide to put prices up. From the outset, the CMA’s approach was ‘computer says no’ — and then they just set about finding a way for the computer to say no,” said Bryan Roberts, a director of the marketing consultancy TCC Global.
One argument the CMA seemed to ignore was the impact of the merger on suppliers, but their delight at last week’s events undermined Coupe’s contention that the merger would benefit them. In a survey conducted by the retail consultancy GSCOP for The Sunday Times, 70% of suppliers said they were happy the deal was unlikely to proceed, with 13% describing themselves as “overjoyed”.
While Coupe and his counterparts at Walmart, including international boss Judith McKenna, may have misread the CMA, few could accuse them of misreading the market.
Sainsbury’s is in a tight spot because of its relatively weak balance sheet. Adjusted for lease obligations, its net debt is 3.6 times underlying earnings — more than twice the level of Tesco or Morrisons. Also, the retailer needs to refinance £650m of debt this year, which will be costlier because its profit margins are under pressure, according to Andrew Gwynn, an analyst at the stockbroker Exane. He believes Sainsbury’s may now have to tap shareholders for cash.
The company said its free cash flow was strong and that it was focused on lowering its leverage.
Under Coupe, whose pay package is worth £3.4m, Sainsbury’s has slashed costs by £540m and pledged another £500m over the next three years — a move the City expects to drive a 3% rise in pre-tax profits to £608m this year.
Those savings have come at a price. Analysts say that axing thousands of manager roles and restocking shelves during the day, rather than at night, has reduced the availability of fresh produce — one of Sainsbury’s strengths. “The cost cuts are notable all over the stores,” said Steve Dresser, who runs the consultancy Grocery Insight. “It’s hard to see how Sainsbury’s recovers without a change in strategy and investment in their stores.”
There is a chance that events will overtake Coupe and the board. Amazon’s acquisition of Whole Foods Market and interest in Waitrose in 2017 show that it wants to delve deeper into the pockets of the affluent. Sainsbury’s still has an enviable estate of supermarkets and convenience stores in southeast England.
Amazon is understood to have considered tabling an offer for a block of supermarkets if Sainsbury’s and Asda were forced to sell them. A move for the whole of Sainsbury’s could be a nice use of petty cash for the $800bn (£614bn) behemoth.
“The Amazon conspiracy grows by the moment now because Sainsbury’s is in a very weak position. They’re vulnerable and being taken out is a distinct possibility,” a senior industry source said.
That could see Coupe in the money again, but for now sympathy from industry rivals is in short supply. Sir Malcolm Walker, the boss of Iceland, chortled: “He’ll have to find a new song.”