Oral evidence: Proposed Merger of Asda and Sainsbury's, HC 1167

Oral evidence, 20 June 2018.

Witnesses

Roger Burnley and Christopher Brown.

Chair

Good morning, gentlemen. It is a pleasure to have you both here. We are inquiring into the Asda-Sainsbury’s deal. We start with A and finish with S, so you have come in first. We are the Environment, Food and Rural Affairs Select Committee, so we will not only be asking questions about consumers; we will also be asking questions about supplies and suppliers, and what effect the merger may have upon those markets, so you are very much welcome. The first question is quite a direct one, really: why does Asda want to merge with Sainsbury’s?

Roger Burnley

Thank you, and thank you for inviting us today.

Chair

Sorry, you had better introduce yourselves, please.

Roger Burnley

I am Roger Burnley. I am the chief executive officer of Asda.

Christopher Brown

I am Chris Brown, and I am the senior director for sustainable business. My role involves sourcing and agricultural development.

Chair

Thank you very much.

Roger Burnley

Thank you for the opportunity to discuss the proposal today. If I can give the market backdrop and some context as to why we want to combine, the retail market overall has changed out of sight in recent years, and that change is faster and faster. This year, it feels like there are examples of fallout from that in the news on a daily basis: Poundworld recently, Debenhams this week, Toys R Us and Maplin, to name but some, and headlines this morning of 1,330-odd shops either closed or with concerns around closure. The retail landscape has changed out of sight. I would add to that list—and pertinently, because it brings us to the grocery sector—M&S and its recent announcement about the proposal to close 100 stores.

Chair

Can I just interrupt you there slightly? What we are trying to drill down on is not necessarily the question behind the consolidation in the market, but why Sainsbury’s? You are quite different. You are much more challenging when it comes to prices. Your prices are less than Sainsbury’s. Sainsbury’s has always tried to keep in the middle range of the market. I do not think you are natural bedfellows at all. It is a marriage of convenience, I think—do you not?—that suits you, and probably suits Sainsbury’s better than it suits you, I suspect. Walmart is going to retain a stake but will probably want to get out in a minute.

Roger Burnley

There is lots in there but, to quickly go back to the grocery sector, competition and change in the grocery sector has never been greater. We have discounters—the main Aldi/Lidl discounters—on the scene; we have lots of smaller bargain stores; we have a big shift towards online. More than that, we have a blurring of eating in and eating out. We have players like Deliveroo and Just Eat. The options available to customers now are absolutely massive. Where are any of us going to buy our tea tonight? The options available are huge as people increasingly shop for tonight and shop for tomorrow. Against that backdrop, Asda is doing well and we have momentum. We have just announced four consecutive quarters of growth.

Chair

I think you are doing better than Sainsbury’s, so why this great desire to combine with Sainsbury’s? I am not convinced.

Roger Burnley

Because we absolutely know we cannot afford to stand still. Our customers are savvier and savvier. They have more choice than ever before. Our role is absolutely to do the best possible job for our customers.

Chair

Your customers are not Sainsbury’s customers; they are quite different customers. It is not a marrying of two similar beasts; it is a marrying of two quite different beasts. Why do you not do something with the discounters? Surely you are closer to the discounters than you are to Sainsbury’s. There is no logic to this deal other than a financial fix for both of you, as far as I can see.

Roger Burnley

No, I would refute that. To some degree, there is no such thing as a wholly loyal customer who just shops in one place any more. Everybody shops everywhere, in general terms. Asda and Sainsbury’s mean different things to customers. At Asda, we are absolutely about value and the lowest possible prices, and we are hellbent, week in, week out, day in, day out, on offering our customers the best possible value. This combination will allow us to do that. It will allow us to invest in prices. It will allow us to invest in being a better us and being a better Asda, and to sustain and secure our business for all our stakeholders—customers, suppliers and colleagues—well into the future.

Chair

You are very keen on prices, and we will drill down some more, but I will have one shot at you on this, because we have to look at the farming and food sector as well as just the consumer. Most of your pork is European pork; you get it from the cheapest possible place. Most of Sainsbury’s pork, if not all, is British. When you combine, I take it that your style of buying will be the case, will it? You are going to save 10%, are you not, all of you? This is interesting—therefore, you are going to save it at the expense of those that supply you. I have had meetings with the chief executive of Sainsbury’s who more or less told me that, so we are bound to be concerned. You are going to be a big beast in the market, combined together. You are going to extract more pain from those. It is not just going to be the Nestlés of this world; it is going to be all the smaller suppliers, and that is where you are going to take it, is it not?

Roger Burnley

There are two key questions in there. Let me give some context to both. First of all, on the Britishness, well over half of what we sell at Asda is British. That includes non-food, much of which is from overseas, so even more of our food is British. We buy British whenever we can while giving value to our customers. Post-merger, we will operate as two separate brands doing the right things for our customer base.

Chair

No, you will not. How on earth can you save 10% and tell us in this Committee that you are going to run two separate things? I am sorry; it is unbelievable. If you are going to make anywhere near the 10% saving in a hugely competitive market, you will have to take the model of the cheapest buying. For goodness’ sake, be honest with us. Do not come in here and give us a load of baloney, because this is baloney, I’m sorry. You have to face the fact that, if you want to save 10% or anywhere near that, you will have to get most of it from the supply chain. I can add up. I am not that stupid. You have two systems of buying in Sainsbury’s and in Asda. For goodness’ sake, tell us some truth, not that we are going to have two separate buying systems. You might for five minutes; you might for six months; you might even for a year. Further down the road, it is going to be one system. Come on, be frank. It is going to be one system with the buying; it is going to be one system with the staff. All the things that are in your proposal to Government are largely political correctness that will all disappear further down the road, so let us have a bit of honesty this morning.

Roger Burnley

We have not shied away from making the point that the synergies from our buying are what make the success of this combination. Let me just give some context to our supply base as I explain that. We have nearly 4,000 suppliers at Asda. A small number of the largest suppliers account for the majority of our turnover. For example, just 24 suppliers account for a third of the items we sell. We are talking about aligning the two buying prices, where we both buy the same item for a different price. We are talking about both of us being able to buy that item for the same price. If one of us buys something for 99p, and the other of us buys that same item for 98p, we are talking about both of us having access to that item at 98p. I think you would agree that that is only fair.

Chair

You have given me the answer to my question, have you not? Largely speaking, most of the lower-priced buying power at the moment in the prices is Asda, so the new regime will be an Asda price range. As you buy European pork, you are not going to buy as much British pork across the whole chain. It proves my question: that this will be the lowest common denominator. This is where it is going. The suppliers will suffer, and it may be beneficial to the consumer or it may not be, because Lidl and Aldi can deliver a better price to the consumer and a good price to the farmer. What you are proposing is quite the opposite.

Roger Burnley

If I can come back on two points there, first of all, as I say, the vast majority of our turnover is based on what are typically large multinational suppliers. We are not talking about creating a new low price; we are talking about merely having access to the price that those suppliers offer one of us already. We then have, of those nearly 4,000 suppliers, 1,700 that we would term smaller suppliers: suppliers with a turnover of less than £250,000 with us. They typically will supply product to only one of the two brands. I hotly dispute that this in seen in some way as a zero-sum game. We need the supply base as much as they need us as a retailer; the two go hand in hand. We cannot be a successful retailer without a successful team of suppliers, supply base and partnerships with them.

Chair

Your whole model is based on the fact that you want to become 30% of the market in order to extract more power. It is absolutely obvious. Tesco is already in that ballpark, so you are going to have two players, very similar, with 60% of the market. We have a Groceries Code Adjudicator but you will know, immediately they pop their heads up, who you have to shoot at. They are going to be terrified. They are terrified enough of you already. The fact that you are just going to be bigger beasts and bite them harder is exactly what is going to happen. Why should you not sort your model out? Why should you not be more competitive? Farmers need to be more competitive. Lidl and Aldi are more competitive, so why should you not be? Why is it the supplier that has to pay the price? I do not think you will deliver the 10% anyway but, irrespective of whether you do or you do not, why is it the supplier that has to pay the price?

Roger Burnley

First of all, I refute that this is the supplier paying the price.

Chair

That is your model. We have had evidence on this privately. We have looked at this. You do not talk about merging the staff. You do not talk about management savings. I suspect all those will come further down the line, but you do not want to tell anybody because you do not want to frighten the horses. At the moment, your whole model is predicated on being able to buy more cheaply. When you buy more cheaply, it will be the producers and the processors, and everybody will pay the price.

Roger Burnley

If I can just give some context to the supplier reaction, yesterday we had our own-brand annual supplier conference; Chris might want to touch on that in a minute. There is a mood of cautious optimism across those suppliers because—

Chair

Yes, because they are terrified; that is why. They would not dare say anything, because you are going to have another Tesco out there and 60% of the market between two players. As a processor, are you going to say anything about this deal? We are having huge problems getting anybody to say anything at the moment, because they are all terrified. I don’t buy any of this.

Roger Burnley

As I say, the suppliers need a successful retailer just as much as the retailers need a successful supplier. Those suppliers have a cautious optimism because, first and foremost, they need and want us to be successful. They need and want volume growth. From this and from us being sustained into the future and having volume growth, they have that too and they can benefit from that volume growth.

Chair

If they meet your lower prices, how are they are going to benefit? That is how your model is predicated. You have to accept the truth of this. It is no good coming in here and telling us what is blatantly not in your model. You have to accept that. You say it is a very cut-throat business out there. Yes, it is, but I know exactly whose throats you are going to cut, so let us be absolutely clear about that this morning.

Roger Burnley

I refute that. If I can come back to the other advantages that the suppliers supplying this combination will have, first and foremost, they will be supplying a successful retailer and we can grow together. Secondly, as I say, it is not a zero-sum game. The suppliers can take advantage of things like potentially having one packaging spec or one quality spec. There are efficiencies in dealing with one overall construct.

Chair

What is that—a quarter of a percent, half a percent? It is nothing. It is very little. There is same saving. I am going to let Angela in now, who has been busy trying to come in.

Angela Smith

The quality spec is an interesting one, and we will come back to that later, I suppose. The Norwich Business School has submitted evidence and, in that evidence, we are told that its own research and separate work by fellow co-authors shows that Asda in particular has often served a market role in holding or leading prices down. There must be a real concern that removing its independent competitive position will effectively take away from the market its important constraining effects on prices. What is your response to that?

Chair

It is a different side of the argument.

Roger Burnley

Do you mean the prices from a customer perspective?

Angela Smith

The evidence from Norwich Business School is that your independent position has an important constraining effect on prices—yes, to customers.

Roger Burnley

As I said earlier, the market has never been more competitive. I dispute those market share figures. At the moment, we have 12% of the market and Sainsbury’s 13%, but that depends on your view of the market. Where people choose to shop and buy their food is like a lottery.

Chair

These figures are reducing all the time. They started off by being nearly 30% combined; now they are down to 25%. It will not be five minutes before they are down to 20%. Where on earth are we on this?

Roger Burnley

If I can just come back to the prices—

Angela Smith

The question is this. You have an important constraining effect on prices in the market. There is a real risk that that will evaporate with this merger, surely.

Roger Burnley

It is unthinkable that we could, wholesale, ease prices up or sneak prices up. Customers have never had more choice. As I say, they have never been savvier. Customers would vote with their feet, whether that is before the merger or after the merger.

Angela Smith

That is not the answer to the question. You are in an independent competitive position and you have a constraining effect on prices in relation to, I suspect, all the other major chains. I do not get a sense from you that you can guarantee that that positive impact on the marketplace will not evaporate if you succeed in merging.

Roger Burnley

As I say, it has never been more competitive. I am sure all our competition will step on again and seek to be more and more competitive.

Angela Smith

Even if one supermarket, effectively—Sainsbury’s/Asda—has 30% of the market, that will not change the equation. Is that what you are saying?

Roger Burnley

There have never been more players. There has never been more choice. Our competition will step on again, and ultimately competition is good. Competition makes us all better and the customer wins when there is more competition. This is ultimately about us being able to do a better job for our customers and offer better prices for our customers.

Angela Smith

Let us just go to that question, then. Let us talk about some of that competition. Much smaller businesses, in terms of market share, have managed to increase their growth dramatically in recent years: Lidl, Aldi; we all know who they are. What prevents Asda and Sainsbury’s as non-merged businesses, staying independent, from introducing innovations as independent businesses and keeping up with the market? Why do you need to merge to innovate and keep the market going?

Roger Burnley

You raise good examples of retailers that are successful, have volume growth and share that volume growth with their suppliers. That is what we are talking about here. We are both successful retailers. We both innovate, but we know we cannot stand still, and this is looking forward to a combination that can secure Asda doing an even better job for our customers well into the future.

Angela Smith

My suggestion is exactly that you will not want to stand still, but why can you not innovate and continue changing as an independent operation?

Roger Burnley

We can and we do, but this is about step-changing our ability to offer customers what they want, which is better and better value and better and better prices. This is about us being competitive, in the most competitive marketplace we have ever seen, well into the future.

Angela Smith

Are you saying that this merger is essential if you are to deliver better prices to customers in the long term? Is this what you are saying? In other words, this marketplace will see increasing numbers of mergers in order to keep competition in place? That does not seem to make sense.

Roger Burnley

I can only speak for Asda. We get out of bed every day to work out how we can give customers better prices and better value, and this is a way for us to step-change that, sustain our future and give customers what we know they want. This is innovation in how we move forward in the business.

Angela Smith

What about Sainsbury’s customers? If I am honest, the quality spec is slightly different with Sainsbury’s. Is quality going to be the price to pay? I suppose that is a question for Sainsbury’s, but this must have been discussed, particularly on meat products and fresh products.

Roger Burnley

We will stay fiercely as separate brands, as I say. It is a misnomer to say we have our customers and each retailer has its own customers. We mean different things to customers and we will stay as fiercely separate brands, as I said earlier, being a better us, in giving customers more of what they want and expect from Asda.

Chair

I am going to give you a chance to correct the record, because I have the figures in front of me for the grocery market share in Great Britain: Tesco 27.7%; Sainsbury’s 15.7%; Asda 15.4%; Morrisons 10.5%; Aldi 7.5%. I am not going to go through them all. When I did my arithmetic, 15.4% and 15.7% makes over 30%; in fact, it makes 31%. Therefore, when you say you have 25% of the market combined, that is plainly not true. Do you want to correct the record or not?

Roger Burnley

Yes. I would say that those numbers look at a traditional view of the grocery market. We are talking about more players involved that are selling food. An increasing number of players sell food.

Chair

No, you said that you had a joint 25% of the market. That is plainly not true. Therefore, are you going to correct the record or are you not? I give you the opportunity to do it now; otherwise, I will pursue this after the meeting, in writing, with you. The ball is entirely in your court. You have not been truthful here this morning, so I am not going to have the wrong figures quoted. You have the choice now.

Roger Burnley

I would like, if I may, to submit to the Committee in writing after the meeting exactly what players constitute the definition of the market, which shows a 12% and 13% market share.

Chair

This is a political answer. You misled this Committee when you said you had a combined share of 25%. Do you wish to correct that or not?

Roger Burnley

Yes, I wish to correct. I wish to submit in writing the constituents—

Chair

What do you believe the figure to be, then?

Roger Burnley

I believe our market share to be 12% of what we deem to be the competition in the market that we are competing with on a daily basis, and then, beyond that, as I said earlier, to give the context of the market, there are more and more places where people are choosing to buy and consume their food.

Chair

I am sorry, but it is not good enough. We will pursue this in writing with you afterwards. I think we have been misled.

John Grogan

I have one very quick supplementary on that. In your calculation of the market, are you including players like Boots as your competitors?

Roger Burnley

No, it is narrower than that in that number. I do not have every retailer that is included in that construct. I believe it is narrower than that, John, but if I could submit that in writing, after the meeting, I will be happy to do so.

Chair

You were likely to be asked the market share when you came to this Committee, and Sainsbury’s will be asked the same questions later, so I am very surprised you do not give us correct figures. Why is Walmart keen to retain a 42% stake in the combined business, and why does Walmart then only have 30% of voting share rights thereafter? It is not a very good deal, I would not have thought.

Roger Burnley

Walmart recognises the potential of this construct to be a part of successful retailer in the UK. It is keen that this merger takes place and very keen to be a part of it afterwards, hence its 42% shareholding.

Chair

I would not want to buy 42% of a business and then only appear to have 30% of the management rights overall. It seems an odd deal to me.

Roger Burnley

Walmart is absolutely happy with the skin in the game, so to speak, that it will have, the share of the business that it will have, and the influence with two seats on the board that it will have in the proposed construct. It is part of Walmart’s international portfolio strategy that it is increasingly taking a different view of how to participate in different markets around the world, and it is consistent with some things it is doing elsewhere.

Chair

I am sorry, perhaps I am quite simple, but why does one buy 42% of a business and then have 30% of the say? I am sorry; I may be a simple man, but it is just not logical.

Roger Burnley

In the negotiation that has taken place, Walmart is happy to have two seats on the board.

Chair

Who is most desperate for this deal: is it Walmart or Sainsbury’s? Sainsbury’s wants to save its pension fund, but why a deal like this? It is very odd.

Roger Burnley

Walmart, Asda and Sainsbury’s all see the benefits and the merits of this combination in equal measure. We are all very keen that it goes ahead because we can see that it creates two brands, sustained and successful well into the future.

Chair

You are obviously very keen, if you buy 42% to only have 30% of the say. As a second question, do you believe that the CMA was more likely to approve the deal between you and Sainsbury’s after the Tesco-Booker merger?

Roger Burnley

The reason we have put this combination proposal forward is not related to the Tesco-Booker merger. It is about the very fast-changing retail landscape that I have outlined. This is in response to the fact that we just cannot stand still. We are successful businesses now, but we cannot stand still. We, of course, respect very much the CMA process. We know they have a long process to go through, and we will work and are working with them closely as they do their analysis.

Chair

You are more profitable than Sainsbury’s, putting it bluntly. We had this merger of all the banks at one stage, because they were all going to save each other. It largely did not work, so is it not the case that, if you are not at all careful, you are doing this merger but it may not save either of you?

Roger Burnley

No. Again, we have momentum, as far as Asda is concerned. We have had four quarters of positive growth but we know we cannot stand still. We know this is very compelling because it means we can—

Chair

Sainsbury’s is largely standing still.

Roger Burnley

I will not speak for Sainsbury’s, but I would say we are both successful businesses.

Chair

You have to speak for Sainsbury’s to a degree because you are about to get into bed with them: “I am going to have this partner but I am not going to speak about the partner”. I think you are, because you have to work out why you are getting into bed with them.

Roger Burnley

I have to say, first and foremost, we are fierce competitors.

Chair

You won’t be in a minute.

Roger Burnley

We remain fierce competitors, legally, for the next 18 months, which means we share very little information. It would be wrong if we were able to do that through this time, but I will say we are a successful business now, and this is about making us a more successful business by being able to do a better job for our customers, as our customers increasingly demand value and lower prices from us.

Chair

The more we go through this inquiry this morning, the more I can see that it is a very interesting merger.

Alan Brown

On the comment there that, as competitors, you cannot share information at the moment, how do you arrive at a model that says you would both save 10%?

Roger Burnley

We have had independent consultants working on the synergy benefits, and the headlines from that have been available for the proposal. However, we do not share the detail of those supply arrangements or pricing arrangements, nor will we through the next 18 months of the process.

Alan Brown

Surely, if you commission a consultant that is able to look at each operation and say, “If you do X and Y, you would save 10%”, that must, by default, allow each access to that information.

Roger Burnley

It does, but not at the detailed level. Can I just clarify the 10%? We have been very clear that we are committed to reducing the price of everyday items that people buy week in, week out by around 10%. There is not a direct read-through from that. Again, this is not a zero-sum game. Where we choose to invest the synergies is not necessarily where those synergies come from, which takes me back to the fact that we do most of our business through a relatively small number of very large suppliers.

Chair

The point that Alan makes is such a good one, because here you are, two major supermarkets combining together, yet you have not talked to each other. This is unbelievable. There are City people sitting behind us listening to this, and I do not think for one moment that they would accept that. If you are not talking to each other, and you have not done a proper deal that is going to work financially, why on earth is the City going to have anything to do with it whatsoever? The more you give evidence this morning, the more unbelievable it becomes. You are trying to spin us a yarn. You are not talking to each other, you have not worked out how the market is going to work, yet you can save 10%. Come on, get real.

Roger Burnley

Can I just correct that? I did not mean to mislead by saying that we had not spoken to each other. My point is that we will not work up and discuss the detail of the individual suppliers.

Chair

You cannot get these figures on a 10% saving and the reason for combining the two supermarkets without having proper discussions with each other as to how this is going to work. I know you do not want the CMA to know that you have had too many discussions, and you have to be so careful about what you all say, but come on; we are not children. You cannot just come in here, give us a little nursery rhyme and think, “This is what the Select Committee is fit for”. We are the Environment, Food and Rural Affairs Select Committee; come on. Let us have some sense out of you, even if it is not the truth.

Roger Burnley

I am sorry, and I am keen to be as helpful as possible. The point I am making is that, legally, we are competitors and are bound by law as competitors, and some of this is market-sensitive information. Yes, of course we have talked about the deal, but not in working up the supplier and product-specific detail within it. To go back to the 10%, we have talked about investing some of those synergy benefits in reducing the prices of everyday items by 10%. That does not mean a wholesale 10% reduction of costs in the supply chain. That is where we would envisage and are committed to investing some of those synergy benefits, and that is not a read-through to the supply base.

Chair

Do you not think, in hindsight, selling this deal on a 10% benefit to the consumer, when you cannot come out into the open and say how much discussion you have had with Sainsbury’s, is somewhat an overselling of the deal at the very least?

Roger Burnley

No. We know the size of the overall synergy benefits. We are absolutely committed to making those savings because we know that is what our customers want.

Chair

You know how you are going to make those savings, so you have had discussions. If you had not had discussions, you would not know how to make those savings. No, I don’t want any more. Let us just park it there because, like I said, we are getting a load of nursery rhymes this morning.

Angela Smith

The chief executive of Sainsbury’s previously acknowledged that the acquisition of Argos in 2016 was intended partly to counter the increasing threat from Amazon. Is the entry of Amazon into the groceries market a key factor in the decision to go through this merger?

Roger Burnley

I don’t know about a key factor, but it is certainly a factor. It is undoubtedly one of the players I have talked about in the more and more competitive market that is changing more and more quickly. Yes, it is certainly one of those players that are making it a more competitive environment and doubtless will in the future.

Angela Smith

Whatever one’s views are of Amazon and the way that it operates, it is incredibly innovative. I go back to my earlier question: is the merger really an attempt to shortcut a campaign to maintain share in the market? Rather than focusing on innovation and competing with Amazon independently, merging with Sainsbury’s is just a shortcut to maintaining market share.

Roger Burnley

It is not a shortcut. It is about unlocking innovation, success and volume growth to our suppliers, and prices to our customers. It is, in itself, innovative.

Angela Smith

I don’t see where the innovation is, frankly. The innovation in Amazon is obvious and quite exciting. I do not buy groceries from Amazon, but it is, nevertheless. Where is the innovation? You are cutting suppliers’ costs and cutting some food costs by 10%. That may be innovation, but it is very routine. Where is the real innovation? Where is the step change?

Roger Burnley

Both businesses are innovating all the time. Walmart innovates. Both businesses will have access to Walmart’s innovation. From the supply base’s perspective, suppliers at our own‑brand conference yesterday that are currently only Asda-brand suppliers were talking about the prospect of supplying Sainsbury’s and taking the best of both worlds, so innovation will be promoted through what we are doing.

Angela Smith

What will happen to Sainsbury’s own-brand suppliers? That is not innovation; that is displacement.

Roger Burnley

Typically, the smaller suppliers I have talked about will only supply our brand. As I say, we will remain as two separate brands but they will have an ambition to sell their unique product elsewhere in the market as well.

Angela Smith

There will be increased competition between small suppliers while reducing competition among the groceries market players.

Roger Burnley

It is not necessarily increasing competition; it is potentially opening up a wider market to those suppliers that currently only supply our brand.

Angela Smith

There are going to be winners and losers in that, clearly.

Roger Burnley

The supply base never stands still but, again, at a headline level, the suppliers want and need volume growth. This is about growing and having sustained growth, and that is why the suppliers understand that that is ultimately a good place to be. They need us growing as much as we need them growing.

Angela Smith

This is the message you are getting from your small suppliers universally.

Roger Burnley

I will genuinely say there is a level of cautious optimism. I say “cautious” because we are unable to share that level of detail: suppliers yesterday were saying, “I would love to be able to change this supply arrangement because Sainsbury’s depot is down the road for me. We are a mile away”. Yes, there is cautious optimism. In the end, our supply base knows that they want and need a successful and growing Asda for them to be successful too.

Angela Smith

Do you see your supply base effectively trumping Sainsbury’s supply base in terms of the future merged arrangements?

Roger Burnley

No, not at all. We will remain separate brands.

Chair

No, you will not, if you are going to save your 10%.

Angela Smith

You just said you are going to bring the supply base together. It does not add up.

Chair

No, it does not.

Roger Burnley

I am sorry; could you repeat the question?

Angela Smith

The point was that you were talking about extending the access of your current supply base for your own-brand products to Sainsbury’s. You want to bring increased competition into play in the supply chain.

Roger Burnley

I gave that as an example of a supplier supplying a unique product to us. Chris, you might want to come in with some examples.

Angela Smith

Can you give us an example of a unique product?

Christopher Brown

A good product example would be Trewithen Dairy down in Cornwall.

Angela Smith

Sorry?

Christopher Brown

Trewithen Dairy. I do not know if you are aware, but it is a supplier with a Cornish supply chain doing Cornish milk in Cornwall. It does not currently supply Sainsbury’s.

Roger Burnley

We have 400 suppliers—

Chair

On the milk, that was the wrong one to go for, because Sainsbury’s has a deal with farmers on milk prices but you do not. You just buy it through the general market. That was definitely the wrong one to go for.

Christopher Brown

Can I help you with that, Chair?

Chair

I suspect that, in a minute, instead of having a Sainsbury’s deal with the dairy farmers, we are going to see no deal at all across the big supermarkets. You have just given me an excellent line there. Come on. Like I said, we are being told a story this morning that suits you and Sainsbury’s, but it is not true, what we are getting. We know that, in the end, it will be the suppliers and the processors that are going to pay your 10%. We have taken evidence privately on this and I am absolutely convinced by this. You might get away with it; you might not. Like I said, we will see. You cannot make a 10% saving in the market without somebody paying for it. This is bizarre; it is absolutely bizarre. Consumers could well benefit, and that is great, but you have to tell us where you are going to get those savings from. You cannot just come in here and say “Everything will stay the same but we are going to make 10% savings”. No, you are not.

Roger Burnley

I will let Chris come in and talk about milk in a second.

Chair

Milk is one of those things; pork is another, which I raised earlier. You have very much a European process of buying pork. You buy the cheapest you can. Sainsbury’s buys British pork. In a minute, you are all going to buy the cheapest you can get, from wherever you can get it.

Angela Smith

And it sells Cornish cheese.

Chair

Exactly. You have no deal on buying direct milk from dairy farmers, but Sainsbury’s has. I will ask Sainsbury’s about that later.

Angela Smith

It sells Davidstow.

Roger Burnley

Can I just come back on the 10% figure? Again, the 10% we have committed to is our commitment to reduce the price of everyday items to our customers by around 10%.

Chair

That is milk, bread, cheese and butter, much of which is produced in this country, and much of it has been under pressure for several years now. This is who is going to pay the price.

Roger Burnley

Again, you should not read through from that 10% for those items to where the synergy benefits will come from and be invested. The majority of our turnover—of what we sell—comes from a relatively small number of typically large international businesses. Where we choose to then invest those synergy benefits is where it means most to our customers, which is why we will choose, as part of investing those synergy benefits, to reduce the cost of everyday items to our customers by around 10%. That is not a read-through.

Chair

You are going to achieve what Tesco cannot achieve at the moment. It has basically the same percentage of the market as you will when you combine, or slightly less. Why is it so useless if you are going to be so good?

Roger Burnley

I certainly do not see it as useless. All our competitors are—

Chair

I was being facetious. Come on. Let us get some straight answers here. We have not had any straight answers yet this morning.

Roger Burnley

At the end of the day, this is about our customers demanding value and demanding lower prices. We seek, every day, to give our customers better and better value, and this will allow us to step-change that.

Chair

Nobody is arguing about that. The argument I am making to you this morning, which surely you should have expected when you came in this room, is about how you are going to get to the 10%. We are largely of the opinion—and I have heard nothing from you this morning to make me think to the contrary—that it will be your suppliers that pay the price, because your model does not make savings elsewhere on staff, management and all these things. I suspect that, in reality, you will make those savings, because you will not stay, in the long term, as two supermarkets; you will combine as one. That is where the savings are. Like I said, you cannot come out and tell us the truth, can you?

Roger Burnley

We will not merge to be one supermarket. We will stay as two fiercely separate brands.

Chair

In reality, that is where it all goes. Again, it is another children’s tale that we are having this morning.

Roger Burnley

I say again that the synergy benefits come from merely aligning the two prices that one of us enjoys already from typically large suppliers. It is not about creating a new low; it is about having access to a price that already exists for one of us in the market.

Chair

Of course it is about creating a new low, because you cannot get to a 10% saving without getting to a new low. It just does not add up. I will park that one there. Finally, before I let other people have a go, did Asda have any formal or informal discussions with the CMA before the merger was announced?

Roger Burnley

No, we did not have formal discussions with the CMA. We worked with advisors who took a view on how the market would be viewed by the CMA, but we did not have discussions.

Chair

You were quite hesitant there.

Roger Burnley

I was being careful to make sure I answered correctly.

Chair

Did you or did you not have discussions?

Roger Burnley

No.

Chair

You did not, so you went into this entirely blind. You and Sainsbury’s went into it entirely blind and presented this to the City, and you have not talked to the CMA at all. We will ask Sainsbury’s the same question.

Roger Burnley

We worked with independent consultants.

Chair

Did they talk to the CMA?

Roger Burnley

That is the bit I will need to check and come back to the Committee on in writing.

Chair

Why would you employ independent consultants if they did not? Come on. We are getting such nonsense.

Roger Burnley

No, I don’t believe so. The consultants had experience and were looking at the whole market and previous examples of CMA decisions, but the consultants’ work has focused on how the market would be viewed and the compelling case for the combination. In the end, we know the CMA has to go through a long and rigorous process. We strongly believe that its outcome will be positive for the combination because, in the end, it is there to represent the interests of customers, and this combination is in the interests of customers.

Chair

When do you hope the CMA’s investigation will conclude?

Roger Burnley

We envisage it being an 18-month process, so sometime in the second half of 2019.

Chair

We are going to have to wait for some time, then.

Roger Burnley

Yes.

Chair

You don’t think it is going to happen sooner than that.

Roger Burnley

I don’t think so.

Angela Smith

Lord Haskins this morning has claimed that this proposed merger gives Walmart “an elegant exit from the British market”. Is that true?

Roger Burnley

No, that is not true. Walmart is taking a 42% share. Walmart could have easily not taken any share, or a smaller share. Walmart wanting and having a 42% share in the combination shows its commitment.

Chair

I suppose one can buy shares and one can sell shares.

Angela Smith

I have to say the word “elegant’ is the operational word: “elegant exit from the British market”. In other words, the hint is that, in the medium to long term, Walmart will exit the British market.

Roger Burnley

I respect Lord Haskins’s view, but that is not true.

Angela Smith

It is not true, so Walmart will be around in 10 years’ time.

Roger Burnley

The industry is so fast-moving that Walmart would not make any commitment anywhere in the business over that sort of length, but it has no plans to make an elegant exit. It is a 42% shareholder of the new combination because it wants to be part of it.

Chair

This is not a short-term fix that suits you and Sainsbury’s, then.

Roger Burnley

No.

Chair

No, interesting. I suppose history will see who is right on that one. David, please.

David Simpson

Thank you, Chairman. The question I was going to ask has been stepped all over.

Chair

Yes, we have rather overtaken it, so I apologise for that.

David Simpson

That’s the way it is. I will come from a different angle on the whole issue around the 10%. The Chairman said that he wants to park it.

Chair

Go on; carry on, David. I wanted to park it, but you don’t need to.

David Simpson

This is from the suppliers’ point of view. Chris, what was your role again within the organisation?

Christopher Brown

My title puts me in charge of sustainable business, but that involves work with the supplier base.

David Simpson

That is the point that I want to raise. You have been very quiet so far.

Chair

Yes.

Christopher Brown

I have tried.

David Simpson

In relation to the whole issue around the supply base, with the merger taking place, how much discussion have you had with your suppliers in relation to this? How often do you review your prices with your suppliers?

Christopher Brown

Roger has already referenced that it was our own-brand supplier conference yesterday, and 400 people were there. I cannot confess to having met all of them, but I met a fair few. That term that Roger used of “cautious optimism” applies. The only information that they have, similar to most people, is what has been in the press. They would love to know what the final conclusion is, but we do not know where we will be in 18 months’ time. Some of them were starting to think, “What are the implications?” Roger gave the example before of being able to talk about opportunities within the Sainsbury’s supply chain; they have already thought that one through. It was a carrot supplier who said, “I grow my carrots a mile down the road from a Sainsbury’s depot. It would save me a lot of logistics issues if I could put them into there”. That is the type of early thought process but, until we see the details and the final conclusion, it is difficult for them to make a final judgment.

David Simpson

In many cases historically, when it comes to pricing within supermarkets, in those meetings with the buyers, the processors and whatever, there is an emphasis on the processors having to tighten their belt: “We have a margin to get; therefore, we need product at a certain price”. Is it as ruthless as that?

Christopher Brown

I don’t believe so. If you look at our history, when Walmart came and bought us back in 1999, I remember the industry saying, “This is going to be a disaster” and everything else. Look at our history. We have been able to show ourselves to be good customers and we have good, strong relations with suppliers. We have long-standing relationships. Our milk comes from Arla. It is a decade-long relationship, if not older, from previous incarnations.

Chair

You do not buy milk directly from the farmers, like Sainsbury’s and Tesco.

Christopher Brown

In 2004, we did. We were the first supermarket to have a dedicated segregated supply chain.

Chair

Not any longer.

Christopher Brown

You will remember, Chair, that the farmers joined the Arla amba co-operative. At that time, the farmers, because we had a representative structure, came and asked if we could pool all our milk. They felt uncomfortable about having an excessive price while being members of a co-operative. That is what we did. In 2015, we established a base price. As a matter of record, the base price we have been paying was related to the market price. The market price was 31p in December. The cost of production model contracts was at 28p to 29p, so we pay a market price for our milk.

Chair

You are quoting me a market price when the market is up. You also pay a market price when the price is down.

Christopher Brown

No, I have a floor.

Chair

The Sainsbury’s and Tesco deal helped the dairy farmer through the tough times. Your model does not. Your model just drives to the market, which is fine, but the whole of idea of these systems is to try to take some of the peaks and troughs out. That is the issue, but carry on, David.

David Simpson

In relation to pricing, and you mentioned the milk situation, more and more discussions have been held—I will refer to Northern Ireland—as regards the processors and the primary producers, in relation to long-term contracts and pricing contracts where the farmer is guaranteed an income at a certain price. In order for that to happen, we need the co-operation of the retailers—the likes of you. What is your view on long-term contracts with the processors, which then go to the primary producer, going forward with pricing to give farmers a sustained income? My last question is in relation to the pricing: how often do you review your pricing with your suppliers?

Christopher Brown

It depends on the product. On things like lamb, which have a market price, we will follow up with the market on a weekly basis. You talked about long-term contracts. Our deal with Arla is a three‑year contract, which gives security for it to be able to see investment in the Arla chain. It extracts value for us too, because that relationship has meant that we have access to some of the Arla-branded products, things like Best of Both and Cravendale butter, which feature prominently in our stores.

David Simpson

I accept what you are doing on milk, and I know you have done that. In relation to meat products—well, milk is volatile as well—as you say, lamb changes on a weekly basis; beef prices move up and down. You are purchasing pork elsewhere. Do you foresee, when the merger takes place, that there will be a greater partnership between the processor and the primary producer going forward? If, at your organisation, this is to be successful, you need the suppliers, just like the processors need the primary producers, for the food chain and the sustainability of food and supply. Do you see, going forward, if the merger is agreed, that there will be a greater partnership between all three?

Christopher Brown

I am not sure I can predict the future to that extent.

David Simpson

Give it a go.

Christopher Brown

We are pretty confident, but we need strong supply chains. We need strong, profitable suppliers. We have a history of delivering long-term business with many of them. Dale Farm would be a good example, moving back to farms.

David Simpson

My final point, from that point of view, is that you need consistency of supply. You, as a retailer, need to realise what the profit margins need to be for the processor, who passes it on to the farmer as well. On the 10% cut, you mentioned a number of products. Can you tell us today what products you are talking about? The Chairman touched on a number of them hypothetically, but can you tell us today what products you are talking about?

Roger Burnley

No, for a couple of reasons.

Chair

This is something else you haven’t talked about.

Roger Burnley

First of all, we are not at that level of detail, genuinely. We are 18 months away from completion. Secondly, it is absolutely competitive information. I could not sit here and discuss our pricing strategy and our strategy from a competitor perspective. I could not and would not at this point. I come back to the 10%: again, the 10% is about reducing the cost of those everyday essentials. That is where we will choose to invest a chunk of the synergy benefits, not where they will come from.

Chair

What are the everyday essentials? One minute you tell us you have not had these discussions and then you talk about everyday essentials, so let us ask you: what are they? You talk about everyday essentials: what are they?

Roger Burnley

It is typically the lines that people buy week in, week out, so it is bread, milk, dairy products and protein products. It is those things that people need to buy every week.

Chair

What are protein products—meat?

Roger Burnley

If I can just come back—

Chair

No, come on; I want an answer to the question. What are everyday products?

Angela Smith

Is fish an everyday product?

Roger Burnley

I am not going to go into the detail of where we are going to be investing our pricing in 18 months’ time.

Chair

You know what they are, do you not? You know what they are; otherwise, you would not be able to get to your 10% saving. This is where you are in great difficulty this morning.

Angela Smith

Nobody goes down the protein aisle at Asda.

Chair

Exactly. “I am going to go and buy protein today”.

Angela Smith

Asda does not do a protein aisle.

Roger Burnley

Sorry, I apologise for using a retail term. We know our customers and the lines that they buy most, and that is how I would characterise them. The lines that they buy most and buy each week are the things that we are hellbent on doing an ever better job on for our customers and reducing for them. We genuinely have not worked up the detail of exactly what those lines will be in the new combination, and it is not something I can sit in such a hugely competitive market and talk through.

David Simpson

On the 10%, the fear is that, when you sit down to look at the products and to look at the reduction of 10%, you will try to make some savings, but the producers will have to make some savings and, ultimately, the farmers will have to tighten their belts on the already extremely tight margins that they are getting. That is the fear, so you have a lot of convincing to do that that is not going to be the case.

Roger Burnley

We understand that fear and, as we get closer to certainty and beyond merger, we will be working hard with the supplier base to allay those fears and let them see how, growing with us, this brings opportunity to both of us. Again, we know we cannot be successful without a successful supply base. Our suppliers need us to be successful; we need them to be successful. It is genuinely a partnership, and I am genuinely not trying to be difficult.

Chair

They are not going to pay the 10%, then, are they? You can tell us on the record this morning that you are going to save it by having a few depots that are closer together and a few percentage points, and the 10% is not going to come from the producer. You can give us that categoric assurance, can you?

Roger Burnley

I clarify again that the 10% is not a number we have talked about in terms of savings—

Chair

Can you answer my question? You can give us a categoric assurance this morning that the 10% reduction in the prices of the essential items that people buy—milk, meat and all those things—will not be made from the primary producer.

Roger Burnley

Yes, I can categorically say that the synergy benefits on which the combination is predicated are not based on making 10% savings from individual suppliers as you are describing.

Chair

What percentage savings are you expecting to make from them, then, if not 10%? You have given us your Mickey Mouse figures this morning. Could you please give us some reality?

Roger Burnley

I am sorry, but it is confidential and market-sensitive information. We cannot talk any more about the synergy benefits than we already have.

Chair

These are the conversations you have not had in order to make your 10% saving, so it all gets bought up by the City and the CMA does not get too cold feet about the whole thing. Like I said, it is just unbelievable.

Julian Sturdy

I just wanted to go a bit further, following on from David’s questions, if I can. You have talked a lot about a step change in how you are going to give better value to customers. You have talked about synergies. You mentioned earlier independent consultants working on savings for you. I understand the market sensitivity and that you are not going to tell us the exact figures or the exact products over this 10%, but could you just give us a broad outline as to what the independent consultants are working on, as in savings and the synergies? If that 10% is not going to come directly from the supplier, what other areas within the business and within the merger are you looking at?

Roger Burnley

I say again that the 10% number is around what we would choose to do on everyday items, which are lines that a lot of volume goes through, but a relatively small number of the tens of thousands of lines that both brands sell.

Chair

The consumer is not going to really get 10% cuts on many products, are they? That is even better now. Basically, you are saying that for very little of your turnover there will be a 10% saving. You cannot have it both ways. Either the consumer is going to get a wonderful deal and they are going to have 10% off many products, or they are going to have 10% off only a few.

Roger Burnley

No, I am not. The point I am making is that we have committed to investing some of the synergy benefits in the lines that we know matter most to our customers, which are the week-in, week-out, everyday essentials. That is where a chunk of the synergies will go but, again, there is no read-through to that 10% having an impact on anybody upstream. That is where we will place some of those synergy benefits, just as that might be on quality or on value elsewhere.

Julian Sturdy

Going back to my question, can you give some examples of where those savings are going to come from? What have these independent consultants talked about? I understand there is some market sensitivity around it but, when you are talking about not taking it from the supply chain, give the Committee some examples of where those savings are going to come from, which the merger, as you or your consultants believe, can deliver.

Roger Burnley

We have been very up-front and we have not shied away from the fact that the majority of those synergies come from aligning those two buying prices to the one that one of us is already benefiting from and, again, not creating a new low. That is really important and only fair. There are two other areas that benefits come from. From a property perspective, we have talked about what has been successful for Sainsbury’s—the Argos stores inside Sainsbury’s stores—and the benefits that that can bring from an Asda perspective. Secondly, there are some synergies on things that are not about goods for retail.

Julian Sturdy

Does that not give you just more market capacity rather than savings? Bringing Argos into Sainsbury’s and things like that just gives you more market—

Roger Burnley

That is part of the model that, from a property perspective, is really efficient and has worked well for Sainsbury’s. Then there is a third chunk, which is not about goods that we are selling to customers. Although we will operate as two fiercely separate brands from separate offices, there are other synergy benefits that would come from being able to operate together. For example, when we look at investment that we might need to make in the future in the supply chain, we might be able to do a better job by looking at the infrastructure of the two businesses. However, we have not shied away from the fact that the majority comes from that synergy in buying terms.

Julian Sturdy

Can I use a hypothetical example? Chris, you were talking to your own-label suppliers this week—you mentioned a carrot supplier. This is just a hypothetical example of a carrot supplier who currently supplies Sainsbury’s, for example, and they choose to supply Sainsbury’s because they are being paid 5% more, rather than going to Asda on the contract. In this hypothetical scenario, when the merger happens, will that carrot supplier be paid 5% less, because that is where Asda is in the marketplace for buying carrots, whereas Sainsbury’s is paying 5% more?

Roger Burnley

No, that is not a read-through. We just are not remotely at that level of detail. The synergy benefits we have talked about, though, are around—

Julian Sturdy

You talked about a 99% to 98% scenario very early on, did you not?

Roger Burnley

Yes, but I come back to the fact that, as I say, a third of what we sell comes from just 24 multinational suppliers. Those are where the synergy benefits most predominantly come from. We are not talking about hurting the small suppliers that we want to continue to work with. As I say, we have 1,700 small suppliers that are really important to us and we need to continue to work with, and we need them be successful as much as they do us.

Chair

That is very good evidence.

Julian Sturdy

Flipping that on its head—and again, it is a completely hypothetical scenario—say that the carrot supplier is supplying Sainsbury’s and getting 5% more over an Asda contract. I do not know whether that is the case with the supply contracts, but I am just using it as a hypothetical scenario. Are you telling me that it might go the other way and that Asda might pay 5% more for their carrots?

Roger Burnley

We just cannot comment at that level of detail, but this is not about those small producers and small suppliers with whom we have and want to continue to have a long-standing relationship. The example Chris gave from yesterday was a guy saying, “I would love to be able to enter the supply chain of the new combination here because it is a lot closer to me”, and maybe, in that example, another carrot supplier is closer elsewhere. That is the sort of opportunity of working with the combination that would come to light. Again, this is 18 months away from the CMA completing its very significant process, and we are not at that level of detail. I am not just being difficult.

Julian Sturdy

I know. I accept that, but do you also understand that there is a level of concern, whether it is a carrot supplier or a coffee house, that these small suppliers, at the moment, do not know where they are going to be in 18 months?

Roger Burnley

Yes, and where we can reassure them we absolutely will. We gave them quite a lot of reassurance at our own-brand conference yesterday. We need and want those suppliers. By the way, lots of them absolutely recognise the three opportunities they see, which are: first and foremost, volume growth from being successful with the new combination, which is so important to them; secondly, opportunities, whether it is quality specs, packaging or the sort of logistics example we just talked through, with the opportunities that can bring; and thirdly, potentially, if they have a unique product, the opportunity to pitch that to the appropriate retailer.

Julian Sturdy

When will you confirm that? When will you go out there and reassure those suppliers?

Roger Burnley

We have been talking to the suppliers about the construct and where those synergy benefits come from. It is important that we communicate with them, and we are doing, on the construct, how this is good and the opportunities this brings them. Of course, they read the media on a daily basis, which takes a certain view, and the negative view is the one that will grab the headlines.

Julian Sturdy

Is it going to be in six months’ time?

Roger Burnley

We will talk to them, but it will only be after the merger completes that we will go into the detail of each supplier.

Chair

It is 18 months down the line, then. We had better leave it there, but it is on record that you are going to look after your small suppliers, so we will make sure we put that in bold letters. Kerry, please.

Kerry McCarthy

We have just covered all of it in a great deal of detail, so skip me.

Chair

I am sorry, but there must be something you want to raise.

Kerry McCarthy

I will come in on later questions but, on the supply chain, I think we have done it.

Chair

Angela, please.

Angela Smith

To some extent, my question has been covered as well, but I just want to return to Chris Haskins’s argument, which was laid out in a piece in the Times this morning very succinctly. The point that Lord Haskins makes is that Sainsbury’s says the pain will mainly hit the 100 largest suppliers, which typically make fat profit margins. I know this is partly about Sainsbury’s, but your point is about the synergies. The point is that, further down the supply chain, there will be an impact. Can you guarantee that there would not be that negative impact further down the supply chain from a merger, if it were to take place?

Roger Burnley

I understand the question. The first thing I would come back to is that it is not a zero-sum game, so the suppliers have an opportunity. It is not about a direct read-through from those typically major international suppliers. We would be very disappointed if it got to the point of a direct read-through to an impact on their primary suppliers. It is not something we would advocate; indeed, we have gone on record as supporting the GCA having extended powers over the suppliers of suppliers. That is a view.

Chair

That would be very useful if we had the Groceries Code Adjudicator expanding.

Roger Burnley

Yes, we have gone on record as supporting that. Again, we see the benefits from those larger suppliers not coming from needing to do that.

Angela Smith

Let us take another supplier. The example used by Chris Haskins is Weetabix. All the wheat grown for Weetabix is grown by farmers within 50 miles of its mills in Northamptonshire. If Weetabix takes a cut as a result of this harmonisation, what will happen to the farmers who supply the cereal? It is a real-life example of the commitment you have just made.

Roger Burnley

I understand the question. I am not privy, right now here, to the margins that Weetabix already makes. I understand that it will have benefits of volume growth with the new combination and other synergy benefits that come.

Chair

Weetabix supplies every retailer in the country.

Angela Smith

It is the same price in Asda as Sainsbury’s today. It is £2. I have just looked online. It is £2 at your store and £2 in Sainsbury’s.

Roger Burnley

I could not even tell you the specific detail of whether there is a variation in that buying price, but I come from the other angle. What is the fairness around either of the two brands at the moment being charged a different price for exactly the same item from a cost-price perspective?

Angela Smith

Can I just ask for a commitment from you? Will you commit to buying from British farmers first and not to reopen negotiations with small to medium-sized suppliers in the first 12 months after the merger goes ahead?

Roger Burnley

Commercially, we would not make any such broad, sweeping commitment. I will commit to our continued—

Chair

You are quite different from Sainsbury’s, because Sainsbury’s buys most of its products—especially its pork and others—from British suppliers, and you do not. This is a real nub of the question.

Angela Smith

These commitments are what the British public will be looking for.

Chair

They like British food and they like good standards.

Angela Smith

Especially in the context of Brexit—the dreaded word—this makes it particularly sensitive. British farmers are feeling very vulnerable.

Chair

Angela, we got through an hour and 10 minutes without mentioning Brexit.

Angela Smith

I know. It was always going to be me, wasn’t it? Seriously, this is a commitment that British farmers will be looking for. You have to win public approval for what you are trying to do.

Roger Burnley

I understand that. We are committed to buying British, wherever we can, at the moment, and that will continue. Over half of what we sell now is British, so I understand the question.

Angela Smith

This is all so nebulous. This is a big strategic merger and yet, when we try to drill down into the detail—what it will mean for consumers, suppliers, farmers and prices—all we get is: “Well, I cannot give you a specific instance. It may be different here. It may be different there”. How can we have any confidence in this merger, given that the strategic case is not being underpinned by the evidence of the impact on a day-to-day level? How can we do that?

Roger Burnley

I understand the frustration and I apologise. I am truly not trying to be difficult. I have been clear on where the synergy benefits will come from at a headline level. At the end of the day, this is a good thing for customers.

Angela Smith

Why?

Chair

But there is no commitment to buy British. I think you have a commitment to buy the cheapest you can get, and you will get that from anywhere in the world.

Angela Smith

It will be New Zealand lamb.

Chair

Just tell us that. Don’t stay here dancing on a pin, basically.

Christopher Brown

No, I disagree. You raised the issue of wheat.

Chair

For your pork, you are going to change from your present system to buying British, are you?

Christopher Brown

We buy from Cranswick, which is a major Yorkshire business.

Chair

Yes, but you buy from all over the place as well. This is the sort of commitment we want here, at the end of the day.

Angela Smith

Our sheep farmers are under threat. They export 40% of their product to France and they need more of the British market, but the risk is that we will see more New Zealand lamb in Sainsbury’s and Asda rather than less.

Christopher Brown

Our New Zealand lamb volumes are down by 30% since 2015. Our wheat in our bread at the moment is 100% British. I am not privy to Weetabix’s procurement system, but a lot of wheat systems are based on the futures markets. They are based on a premium above where the future markets are, and those are based on global trends. We all know that that is part of what the food industry operates to.

Angela Smith

What you have just said I totally understand, but it indicates a real difference in ethos, I suppose, for want of a better word, between Sainsbury’s and Asda at the moment, because Sainsbury’s thinks that its market share depends partly on having a commitment to a farm-to-fork supply chain and direct relationships with British farmers. It is the risk of that being compromised that we are most concerned about.

Roger Burnley

I understand the question. I would say again that we are very separate brands. We mean different things to our customers. We too are committed to be British wherever we can offer the right value to our customers. Our track record is to become more, not less, British. I will not try to forecast what will happen beyond the merger, but—

Chair

Why do you want the merger if you are going to remain separate? I am sorry; it is just not reasonable.

Roger Burnley

You are talking about the most British of the big players combining with one with an ambition to be British wherever we possibly can, while giving our customers what they want. That, overall, is good news for British farming.

Angela Smith

Why?

Roger Burnley

Because it opens up more opportunity. There is inherently more Britishness and more opportunities for those farmers, by the way, supplying a successful, growing business.

Angela Smith

You will be using more of Sainsbury’s suppliers. That is not what you said earlier.

Roger Burnley

Over half of what we source is from the UK. We will be a more successful business as a result of this combination. Our suppliers will share in that success.

Chair

Over half of what you source at the moment is from the UK, so that is reasonable, is it, in your view? I think that is far too low.

Roger Burnley

That includes all our non-food, as I say.

Christopher Brown

And bananas and citrus.

Roger Burnley

And wine.

Chair

What are the figures on cheese and butter? We would like those in writing, please.

Roger Burnley

Yes, I am happy to submit that after the Committee. All our milk is British, for example.

Chair

We are not going to get a commitment to buy British, so we are wasting our time.

Alan Brown

If we look at the Groceries Supply Code of Practice and compliance with the practice, in a 2017 Groceries Code Adjudicator survey Asda came out second bottom in the pile. By contrast, Sainsbury’s was second top. The Groceries Code Adjudicator said she hoped that, following the merger, Asda will move up towards where Sainsbury’s are operating. Do you share that optimism?

Roger Burnley

First of all, merger or no merger, I am hellbent on continuing to improve our track record in how we deal with the supply base. Those instances that resulted in last year’s survey, which I am utterly not going to defend, are around a specific piece of work that Asda did back in 2016. Since then, we have worked really closely with the Groceries Code Adjudicator. We have put in place our own supplier liaison function with a senior director. We have the supplier helpline and we have gone again on compliance training. We have put a lot in place. At that survey, 88% of suppliers said that they were happy in their dealings with Asda, but that 12% is too big and, on my watch—I have been chief exec since 1 January—I am hellbent on reducing that and constantly improving our track record. In the survey this year, I am confident we will see a significant improvement, but we will never rest on our laurels. I guess the point I am making—and I am answering your question slightly differently—is that it is a big thing on our agenda anyway. I would see that only improving because you are right: Sainsbury’s has long had an excellent track record of those dealings, and I would see that only giving more impetus and pressure to continue what we are doing.

Alan Brown

Timing is everything. This coming Monday, the new results are out for 2018, so are you saying that you are really confident that there will be a marked increase in Asda’s performance?

Roger Burnley

I think we will see an improvement in our performance. It is a never-ending journey and we still have work to do, but we are very committed to doing it. We have worked very closely with the Groceries Code Adjudicator, who has worked with us but held us to account over the last year as we have done the right things.

Alan Brown

I mentioned Sainsbury’s, because Sainsbury’s is pertinent with the merger, but the real benchmark is how Aldi has been performing. How far away do you think you are from getting to that level of compliance?

Chair

Are you going to raise your level of standards to Sainsbury’s or are you going to reduce them?

Roger Burnley

As I said earlier, Aldi and Lidl are examples of businesses benefiting from volume growth, from being successful, and their supply chain benefiting from that as well. That is exactly what we are seeking to achieve with this combination.

Chair

You are seeking more of a Lidl/Aldi, are you, rather than a Sainsbury’s?

Roger Burnley

No.

Chair

That then takes me back to my question that I started off with: you are incompatible.

Roger Burnley

No. The point I was making is that they are examples. They have very different models from us. They typically offer a much smaller and narrower number of lines through which big volumes go. We have a much greater product range for our customers.

Chair

Just on the supply chain, one thing that Lidl and Aldi are very good at is that they pay the farmers and the producers quite a good price, take less out for their retail marketing and then sell it to the customer at a better price. This is what I am trying to drill down on: is that the model that you are looking forward to? That is definitely not Sainsbury’s model, so, in the marriage that you have had no discussions about, are you two compatible?

Roger Burnley

I say again that those retailers operate different models and are very successful. I give them as examples of, first, how competitive the market now is and, secondly, how everybody benefits through the supply chain when a retailer is doing the right thing for its customers and growing as a result. That is what this combination is ultimately about.