What history can teach us about the risks (and opportunities) in the Sainsbury's / ASDA merger...

The recent announcement that Sainsbury's and ASDA are exploring a merger highlights some of the big challenges and opportunities facing the retail industry. First, some of the facts about the merger and the consolidated business it will create:

1. 330k jobs
2. 31% combined market share (leapfrogging Tesco with 28%)
3. ￡51bn combined revenues
4. Walmart will own 42% 
5. Nearly 3000 retail outlets 

A behemoth of a business no doubt and the new incumbent in the grocery sector. This thought reminded me of a presentation give by KirkVallis from Google in 2015 (Kirk’s presentation is from 27:30), about agility and disruption of incumbent businesses.

Vallis discussed how Google bring creative-thinking, disruption and innovation into their business model. He mentioned that Google anticipate that they may not be in the search space (their cash-cow) in 20 years. As such, they actively explore ideas, products, models and ways of thinking that have the power to disrupt their business over the coming years. This approach led to new ideas and product innovations such as driverless cars, Google Glass, Google Maps, Daydream and many other innovations - some successful, others less so. This is both a healthy and important process for large businesses like Google or retail giants like Walmart, Sainsbury's or ASDA. You only need to look at history, to see that disruption of incumbents happens time and again: 

The average lifespan of a company in the SNP 500 in 1950 was 75 years. Now the expected lifespan is just 12 years

Kirk used the story of the spice trade to highlight this point further (paraphrased):

“Originally the spice trade was an incredibly lucrative market; spices were transported globally, highly valued as an important commodity for the preservation of food. But almost overnight, this market was undermined by the ice-trade. Innovative designs of ship hulls and the carving of huge blocks of ice, meant that food could be transported long distances, or kept locally, in ‘ice-powered’ freezers. But this market was in turn disrupted by the man-made ice trade; technology advanced that meant we didn’t have to go to Alaska or elsewhere to carve out huge blocks of ice anymore, it could be manufactured locally. This market in turn was completely disrupted and destroyed by the refrigeration trade…”

The lessons here are clear: 

1. Traditional / incumbent businesses are under continual, growing threat from technologically or operationally advanced competitors (both within and beyond traditional markets)
2. The larger you are the harder (and often slower) it is to ‘turn the ship’ around
3. All businesses have to focus on their current market context. But if you don’t also invest in understanding and exploring significant change/challenges to your business model, with an outcome of both preventing unexpected threats and identifying new opportunities), ultimately this could spell your downfall
4. Incumbents rarely ‘actively’ challenge themselves to think what will come next, rather relying on steady incremental gains, consolidation and other traditional business tactics to maintain market share

To build on this last point, Vallis mentioned a conversation he had with the Adidas team, who had been developing the lightest ever football boot (weighing a staggering 104 grams). He mentioned they we’re hugely proud of the fact that they were developing a football boot weighing 98 grams - wow! Kirk, dryly commented to the Adidas team (paraphrased):

  I’m not sure that the people who weren’t buying your 104 gram boot will be going gaga for the must-have 98 gram boot. What if Puma developed a 3D printer that for ￡1000 provided a life-time licence to print any boot in any colour or design? I think people would accept much heavier boots in exchange for that kind of product innovation. What would that do to your market…?

He was highlighting the point that while incremental gains are important to ensure your business continues to move in the right direction, they do not take account of the larger, often unknown, existential threats that will face all business at a certain point in time. It is only when a category disruptor arrives then changes or challenges the way people interact with brands and purchase products or services in a new way, that an incumbent business takes note and action - all too often too late. 

A quick look at Nokia here presents an interesting viewpoint. A business that got it so right for such a long part of their history (shifting from rubber boots to submarine cables, to plastics, to telephones), only to get caught up in the incremental gains of tech-spec-driven one-up-manship in the late 90s and early 2000s. They lost market share, brand equity and market cap in a staggering fall from grace, thanks to the disruption brought to the phone market by Steve jobs and the iPhone, that they were simply too slow and inwardly focussed to anticipate, adapt to and survive.  

The combined Sainsbury's - ASDA business over the short to medium term, will focus on the existing market context, shareholder and customer demands; competition from discounters, the stagnant real-terms wage growth and technological developments (slowly, but steadily) changing shopping habits. The merger looks well placed to tackle these areas. However, there is little evidence of a fully formed long-term strategy to tackle the impending disruption from the likes of Amazon. 

Sainsbury's CEO, Mike Coupe commented on the merger:

This is transformational… It will create a business that is more dynamic, more adaptable, more resilient and an even bigger contributor to the UK economy

Whilst this is undoubtably good news for the consumer today, the focus on incremental gains (lower prices) as a core customer benefit of the deal may have its limitations in a world where Amazon, amongst others, will shake up the way people think about and conduct the weekly shop in the coming years. 

To challenge Coupe’s comment further, big ships move slowly, are less agile and less able to adapt to the rapid changes around them. The combined business will undoubtably have greater purchase power, drive larger revenues and will greatly impact the UK economy (for both good and bad - job cuts are surely on the cards). But larger ships turn slowly, are less adaptable and less dynamic in the face of more genuinely agile competition. 

Bill Gates has a great quote which sums the challenge of change, facing not just the retail industry but most others too:

We always overestimate the change that will occur in the next 2 years, but underestimate the change that will occur in the next 10 years. Don’t be lulled into inaction

The proposed merger is certainly action. It is a move to consolidate buying power and feed this down to the consumer in the form of lower prices, and ideally more choice. This is a deal that is focusing on the ‘next 2 years’ in Gates’ quote. Arguably missing the bigger picture existential challenges coming from the likes of Amazon and new technologies that will increasingly change consumer buying behaviours and patterns over the next few years.

The grocery sector however, has had a slightly longer warning of the impending disruptor challenges than the black cabs and private hire taxis had from the likes of Uber. Amazon’s intentions are clear, just look at their moves in the US market - exploration of models such as Amazon Go and filing patents around drone-based fulfilment. Walmart can see these challenges more clearly than most, due to proximity to Amazon and the US consumer. 

With Sainsbury’s earlier purchase of Argos however, the signs point to elements of a strategy that could tackle future existential threats posed by the likes of Amazon. Argos a digitally savvy, fulfilment-focused, customer-centric business model better positions the combined businesses to match and compete in a world where transaction and fulfilment happen in an increasingly automated, hands-off, ‘little and often’ way.

Time will tell if this is the start of something significant that will shape the future of retail in the UK. Or, if this will become one of the final chapters in the journey of supermarket retail.