After the hype has faded, how will Sainsbury’s deliver the benefits of a new merged entity with Asda?

The Asda and Sainsbury’s merger follows a spate of consolidations in the retail sector as companies grapple to contend with the discounters, changing consumer trends, challenging economic environment and the ever-present threat of Amazon. The question is how an expanded Sainsbury’s will manage the complexity of delivering the synergies while continuing to implement the significant portfolio of change already underway and maintain focus on the basics of retail operations.

 

The merger allows Wal-Mart to reduce their exposure to the challenging UK retail market and creates an immediate £3bn cash benefit[1]. For Sainsbury’s, the fundamental driver is scale; increased supplier negotiating power, more Argos stores rolled-out across the Asda retail network and additional operational efficiencies.  The merged entity is forecast to deliver £0.5bn[1] in synergies by the end of the second full financial year and create an organisation that is ‘more dynamic, more adaptable, more resilient’[2]. Achieving the full synergies from an acquisition is always challenging, but creating a new agile organisation from a group consisting of three merged companies[3] with over 330,000 employees will add complexity.

Mike Coupe and the Sainsbury’s board displayed courage in their determination to fundamentally transform the business through acquisitions and to evolve the company’s business model, challenging Sainsbury’s traditional ways of working. In the last 24 months, the press focus has been on the acquisition and integration of the Home Retail Group and more recently the Nectar card business. However, significant change is also taking place across the Sainsbury’s group. Sainsbury’s is slashing its branded product range, enhancing their own brand proposition, reducing supplier costs, trialling fundamental changes to the way Nectar card will operate and continuing to test new e-commerce models, like the ‘chop-chop’ one-hour delivery service. 

Over the next 12 – 18 months, Sainsbury’s will need to ensure the proposed merger and the inevitable Competition and Markets Authority (CMA) review does not distract the business from executing the current portfolio of change programmes and delivering the day to day basics of any retail operation. Careful portfolio planning will be critical to prioritise the change programmes, allocate the right resources and deliver an integrated plan that ensures the business is not paralysed by change. A fundamental component of the portfolio planning will be the development of a change programme that guides the workforce along the transformation journey and overcomes the risk of change fatigue.

It will take significant effort to define the new operating model and organisational design that can truly deliver an agile entity. The intention is to maintain the Asda brand and keep the head office in Leeds, but operational efficiencies are still expected from across the two head offices and supply chain functions. At the heart of the operating model will be equipping the talent within the organisation with the right skills and capacity to succeed in an organisation with a seemingly insatiable appetite for change.  

Investment and transformation of Sainsbury’s digital infrastructure must underpin the new operating model. The ability of the merged business to deliver customers a compelling proposition and seamless service across all companies and channels will depend on the underlying digital infrastructure. The merged entity will lose access to Wal-mart’s systems, particularly Retail Link ®, at the end of the transition period and will need to migrate the Asda business on to Sainsbury’s platforms. Large-scale system migrations are complex and risky activities when business critical infrastructure is impacted. These complexities  were demonstrated with the transition of Safeway on to Morrisons platform’s following the acquisition in the mid-2000s. The integration encountered cost overruns and resulted in significant disruption to retail operations. Sainsbury’s is at the start of a digital transformation journey as they look to leverage the Argos supply chain platform and assess how digital enablement can accelerate the value from the Nectar acquisition. Managing the complexity of incorporating Asda into this digital transformation journey will require careful planning and further investment building Sainsbury’s digital capabilities.

There is no doubt that the merger has the potential to be a game-changer, but the scale and complexity of the transformation cannot be underestimated. Sainsbury’s leadership will need to apply the same level of vision and ambition to executing the transformation programme as with their M&A activity.

[1] https://www.about.sainsburys.co.uk/~/media/Files/S/Sainsburys/documents/reports-and-presentations/2018/FY%20results%20and%20Combination%20FINAL%20booklet.pdf

[2] Mike Coupe, Sainsbury’s CEO, April 30th 2018

[3]Home Retail Group, Sainsbury’s and Asda 

 

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Author

David Griffin Principal