By Mark Fairlie
The UK’s biggest supermarket chain, Tesco, has recently announced plans to create a “strategic” buying alliance with Europe’s largest retailer, Carrefour.
With such intense competition in the grocery sector, the two global leaders hope to work together to purchase both branded and own-brand products and supplies; allowing them to lower prices for customers whilst improving quality and expanding their range overall.
Tesco and Carrefour
As the largest grocer in the UK, Tesco measures up as the third-largest retailer in the world. With reported sales of over £57.5 billion across ten different countries, they employ almost 440,000 people in their 6,800 stores worldwide.
Carrefour, on the other hand, is the largest retailer in the whole of Europe. Whilst relatively little known in the UK, Carrefour owns more than 12,300 stores across 33 countries; almost double that of Tesco. Whilst they have fewer employees, at just 379,000, the company reported sales of more than €88.2bn last year; equating to £78 billion here in the UK.
The two supermarket giants have been discussing a potential alliance for more than two years and, despite no formal deal having been signed yet, they say they hope to confirm the agreements within the next few months.
Why are Tesco and Carrefour joining forces?
The drastic move comes at a time when retailers are facing increasingly formidable competition. The grocery sector is going through a period of rapid change, in all aspects of the word.
The first most notable problem faced by Tesco is in old rivals joining forces, with the Asda-Sainsbury’s merger announced earlier this year. Whilst Asda and Sainsbury’s are smaller than Tesco respectively, the proposed merger would mean they overtake Tesco as the largest retailer in the UK.
Sainsbury’s have also made it clear that should they take over Asda as planned, competition regulators have given them free rein to target their biggest suppliers for cost reductions using their newly increased buying power.
This is exactly what Tesco hopes to do through their own alliance with Carrefour; squeezing their suppliers to lower prices in order to pass the savings on to customers.
New players to the supermarket game have also made things more difficult for chains like Tesco. Last year, Amazon purchased upmarket grocery chain Whole Foods, and have even begun offering fresh food sales and deliveries in Greater London and the South East of England through their Amazon Fresh service.
In contrast, whilst Tesco still deliver food and other groceries, they recently announced their non-food website Tesco Direct will be shutting down on 9th July 2018.
Retail experts were quick to point out that the continuing strength behind Amazon’s position in the global market was the main reason to terminate Tesco Direct, and could have a further impact on Tesco’s position as the UK’s leading grocer.
Martin Lane, managing editor of money.co.uk, said that
“yet another retailer has succumbed to the pressure of retail giant Amazon. Tesco Direct shutting … suggests not even key players are safe in the current climate – it’s not just the high street suffering.”
Many have also suggested the proposed alliance between Tesco and Carrefour will be used to fight back against the rise of global discounters Aldi and Lidl undercutting prices on own brand products.
How will this “strategic relationship” look in practice?
This monumental buying alliance would mean huge changes in the industry, namely for Tesco and Carrefour’s current suppliers. The alliance is planned to continue for at least three years, as the two place more pressure on their suppliers to drop prices.
Tesco and Carrefour will team up to purchase products for their more than 19,000 collective stores; a move that they claim will give greater choice and value to their customers.
Buying both own-brand products together and securing better deals from multinational corporations such as the Nescafé makers Nestlé and Persil and Marmite creator Unilever. The two supermarket giants are also expected to further reduce costs by sharing the purchase of petrol for delivery vans and other functions such as legal services.
How will the alliance impact the sector?
Tesco chief executive Dave Lewis said of the alliance:
“By working together and making the most of our collective product expertise and sourcing capability, we will be able to serve our customers even better, further improving choice, quality and value.”
Analysts have estimated that the combined buying power between Tesco and Carrefour could exceed £80 billion each year; with the two groups saving more than £400 million from the alliance.
Chief market analyst at Markets.com, Neil Wilson, said that
“an entente cordiale between the two giants of British and French retailing is yet another sign that squeezing the cost base is the biggest priority for supermarkets as they seek to contain the discounters and protect margins.
“On both sides of the Channel, rising costs are putting pressure on margins. Meanwhile, every retailer is looking over their shoulder at Amazon and the potential disruption it could still cause in the grocery sector.”