Mike Coupe, the chief executive of Sainsbury’s, is not a frivolous man. If anything, the University of Birmingham-educated boss could even be described as a quite serious figure. So when he was captured quietly singing ‘We’re in the Money’ while waiting for his interview with ITV News to commence this week, you know he is probably onto something.
The revelation that Sainsbury’s and Asda intend to merge was met with initial scepticism that a deal of this magnitude would be approved by the Competition and Markets Authority. But Coupe’s tuneful levity suggests otherwise and he has good reason to feel positive about the long-term prospects of the merger.
The newly created supermarket giant would take a 31% share of the supermarket sector, putting it ahead of Tesco as the biggest player in the UK. There was a time when this kind of merger dominance would have proven difficult for UK authorities to approve.
But times change and with Amazon breathing down everyone’s necks and Google and Facebook together taking more than 50% of the UK’s digital ad spend this year, there is a much greater tolerance for a deal that sees one company take one third of supermarket sales.
And those odds have only shortened thanks to Sainsbury’s astute management of the merger deal so far. Coupe might have made a bit of a tit of himself with his little ballad this week, but otherwise his orchestration has been perfect. Making it clear that prices of essentials might drop by as much as 10% after the merger will ease regulators’ troubled minds for starters. So too will the acceptance that a considerable number of Sainsbury’s and Asda supermarkets – between 70 and 100 – will need to close in areas where the conjoined company has too much local dominance.
The brand architecture challenge
Assuming the deal is eventually approved, the only other sticking point appears to be the challenge that Asda and Sainsbury’s are very different brands. Even if the deal gets past the regulators, can the new company really work?
The answer is a resounding yes, but it will depend on addressing the crucial challenge of brand architecture. This is not the first time I have written these words for Marketing Week, but let me do it again with this mega-merger in mind: brand architecture is without doubt the most important and yet most underestimated concept in branding.
Most companies operate more than one brand. The number of brands a company chooses to offer and the manner in which these brands are linked to each other, or judiciously kept apart, in the mind of the target consumer falls under the weighty topic of brand architecture. And while the arrangement of logos might look like a lightweight issue, the implications of having too many brands or structuring them in an inefficient way can lead to strategic paralysis, operational chaos and a massive dampener on profitability.
In the case of Sainsbury’s/Asda it is quite clear that both brands will continue to exist. That is partly because each has significant amounts of brand equity, because each serves a significantly different segment of the market (albeit with some crossover) and because these brands have very different associations. Sainsbury’s still wins on quality and fresh food, Asda on lower prices.
At the front of house, where the customers hang out, it is imperative that they continue to see distinct and very independent brands with no apparent connection.
Combining the two, as any brand manager will tell you, wouldn’t create a supermarket mega-brand with associations of quality and value. It would create a crap Frankenstein’s monster of a brand – the worst of all things – that would be hunted down and executed by the expert marksmen from Tesco, Waitrose and Aldi. There might be one company in 2019, but there will still be two very distinct brands.
If the newly merged organisation gets the brand architecture right it faces the genuine possibility that it will reduce operating costs while “sharpening” the differentiation of both brands in the market, as promised. I’ve seen it before first hand: when a single brand joins a group it suddenly finds itself with greater resources and encouragement to target and position far more tightly than it had ever dreamed possible as a standalone operation. There is a realistic opportunity for Sainsbury’s/Asda to cut its costs, strengthen its respective brand positions and ultimately reverse its declining market share.
A new brand structure
There are two big challenges that might get in the way of this dream scenario in my experience. First, both Asda and Sainsbury’s will need to learn how to operate a house of brands structure. Arguably, thanks to Asda’s Walmart links and Sainsbury’s ownership of Nectar and Argos, both companies have already experienced the initial challenges of multi-brand management.
In reality, however, the challenge of creating a management structure and strategic approach that allows both supermarket brands to play their own game – sometimes in direct opposition to each other – is one that escapes most big companies. It looks good on paper to operate multiple brands but the paper turns to shit once operations actually commence. Brands bleed into each other, reporting lines become blurred and over time the strength of each brand becomes weakened as a result of their common ownership.
Executives might point to Procter & Gamble (P&G), Unilever and LVMH as examples of companies that can operate dozens of brands without any apparent inhibition. But the truth is that these companies have built this competence over a marketing lifetime and organisations like Asda and Sainsbury’s, which until recently had both operated as branded houses, might struggle with the multi-brand challenge when it commences.
The other big issue is where to draw the line. A house of brands is a fascinating thing to operate because at the front of house, where the customers hang out, it is imperative that they continue to see distinct and very independent brands with no apparent connection. Fiat is seen as being separate from Ferrari. Creative Review is totally different from Marketing Week. Guinness and Baileys sit at opposite ends of the bar. But the fiscal reality at the back of the house is that all the revenues from the brands that occupy the house of brands architecture all flow to the same, single corporate repository.
At the front of the house there is distinctiveness, at the back there is singularity. The corollary is a need to work out where the distinctiveness ends and where the singularity begins. Draw that line too deep into the back of the house, and the synergies and cost savings will not be sufficient to make the company profitable. Draw it too shallow and close to the front of house, and the brands will be undermined, brand equity reduced and ultimately revenues will dwindle.
One of the big challenges facing Sainsbury’s and Asda’s new leadership team will be to work out how much they can unite their back-of-house synergy and how much they should leave distinct. To make this assessment all the harder, the correct location for the line varies with different companies.
LVMH is almost fanatical about allowing its 70-something brands as much independence as possible, going as far as encouraging separate manufacturing, R&D and customer research. P&G, in contrast, draws the line in a much more shallow (but equally strategically appropriate) place and pushes most of its brands to share manufacturing, R&D and category research.
A merger of retailers is especially hard because there are tremendous savings to be enjoyed from shared services; logistics alone could save the new company millions. But there are equally important advantages from ensuring that both Asda and Sainsbury’s retain their singular identities, merchandising and private labels.
But the commercial imperative driving this merger cannot be ignored. With German discounters Aldi and Lidl continuing to smash the market, and Tesco now clearly out of recovery mode and regaining its stride, both Asda and Sainsbury’s are looking at long and lonely slides in market share over the decade ahead. This merger is a bold and potentially brilliant solution. But if Mike Coupe really does want to be “in the money”, they will have to build a house of brands architecture big enough to allow both Asda and Sainsbury’s to prosper.
The post Mark Ritson: Asda and Sainsbury’s must balance unity with differentiation to make their merger work appeared first on Marketing Week.
Phvntom, Inc. is a digital marketing company located in Boise, Idaho that creates websites, apps, and full-scale promotions/campaigns for other businesses. The views and opinions expressed in this article are strictly those of its authors and were not written by Phvntom. This article was originally published by Marketing Week.