Why a UK retail tie-up is bad news over here

Why a UK retail tie-up is bad news over here

By John Whelan

Even more disruption looms for Ireland’s agri-food exporters who have traditionally supplied the UK’s food processors and supermarket chains.

The retail market was worth many billions last year and has for many years been the main market for food producers stretching from Lakelands dairy products and Kerrygold butter to smaller producers such as Keohane Seafood, Broderick’s handmade cakes, and O’Donnells Crisps.

The announcement that Sainsbury, the second largest British supermarket, plans to acquire Asda for €8.3bn is a bombshell to suppliers who fear that it will ignite a price war in the wider market. 

Merging retailers have in the past claimed the benefits of purchasing power, cutting costs and higher profits. The quickest way to do all of those things is to demand lower prices from suppliers.

And the early signs are that cost-cutting could be more bloody this time, as the combined market share of Sainsbury and Asda will leapfrog the current market leader Tesco which has struggled to fight off the discounters Aldi and Lidl and regain investor confidence following its 2014 accounting scandal. 

The market leader will not easily give up its dominant position and will enter the fray with its own bout of price cutting.

Irish suppliers will be particularly worried as they have been struggling with a weak sterling which has eroded margins since the Brexit vote. 

There is ample evidence that sterling could weaken further in the event of the UK exiting the EU without a comprehensive free trade deal, eroding the margins of the Irish agri-food suppliers further.

There is also a serious risk that Theresa May’s rhetoric of “taking back control” will be used as an excuse for abandoning the EU’s strict EU food safety and quality standards in favour of lower standards.

Theresa May
Theresa May

Food costs have been rising in the UK following the weakening of sterling.

Reversing this, and achieving a low-cost food regime could offer a visible win for an embattled British prime minister and the pro-Brexit members of her cabinet.

One source of cheap foodstuff could be the US. Some seeking a hard Brexit anticipate the UK will become an importer of cheaper mass-produced US food. 

Tesco, as well as a combined Sainsbury-Asda, would have the scale to import and market a wide range of food products from the US. 

Moreover, US president Donald Trump’s administration is actively trying to widen the gap between the US food safety regime with that of the EU, with the collaboration of members of the US Congress and powerful sections of the US food industry. 

The UK authorities could negotiate a trade deal with the US that opens the UK market up for US beef, milk, dairy products, and GM foods.

An indicator of how policy can quickly change is the recent shift by Sainsbury which once was firmly committed to Fairtrade, to looking at its own commercial Fairtrade policy. 

Tesco also announced it will replace its Fairtrade coffee and replace it with its own-label rainforest certified coffee. The other major issue for Irish food suppliers, if the UK leaves the EU, is the issue of tariffs.

Tariffs are taxes imposed when a food crosses a border. A hard Brexit would mean UK food receiving tariffs of 22% according to the British Retail Consortium. 

The UK imports about a third of its food from within the EU, Ireland being the second largest source; if these supply routes are subject to 22% tariffs, there will be serious consequences.

Many Irish suppliers fear this will be done at their expense with many potentially forced out of the business.

John Whelan is a leading consultant on Irish trade and business.

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