Catering, not indie retail, is the key to Tesco-Booker merger

Charles Hall_picture quote

It is great to hear that everyone will benefit from the Tesco ‘merger’ with Booker, including consumers, independent retailers, caterers, small businesses, suppliers, colleagues and shareholders.

The order of that list is clearly well considered given that it neatly encapsulates the likely order of priority as seen by the CMA. It may even turn out to be true for a number of the categories as the merged business will be able to utilise its cost efficiencies and reach to deliver an improved service as well as more competitive prices to consumers. However, it is also somewhat disingenuous.

Some suppliers may well benefit from new opportunities, but there will be plenty that will be quaking at the thought of Tesco’s enhanced buying power and ability to access the lowest terms. Branded suppliers will be firmly in the firing line and private label suppliers will be assessing a potential opportunity. The procurement savings are estimated at £97m and these will not just be achieved by supply chains efficiencies. Also, a number of independent retailers may not like the idea of both being supplied by and competing with Tesco. Furthermore, colleagues may well appreciate the ‘new career opportunities’, but plenty will clearly contribute to the £17m of central cost savings.

The initial focus post the announcement has been on the level of overlap between Tesco and Booker and the potential remedies if the CMA takes an aggressive view. The CMA is likely to focus on local market share and will inevitably closely map all overlapping stores. This will undoubtedly throw up some areas of local domination, however, this is likely to be a relatively minor issue as there are plenty of competitors to Booker who would be very happy to take on unhappy independent retailers. This should largely negate concerns that Tesco could abuse their position with predatory pricing. Some independent retailers may feel queasy being supplied by Tesco, but that has not prevented One-Stop from thriving.

Even if the CMA does force Tesco to make concessions, the reality is that the independent retail segment is not the key driver for the deal. We believe that Tesco is far more interested in the catering side of Booker, which provides strong growth and a large proportion of profits and cash generation. Furthermore the attraction of an established national distribution network must be compelling, just as Sainsbury’s acquisition of Argos was more about distribution capability. This will bring flexibility to Tesco’s model and provide an opportunity to move onto Amazon’s patch just as Amazon looks to establish a position in food. On that note, will Amazon be happy to see Tesco buying Booker? Will Walmart think about adding convenience and catering to its superstore business and will Sysco be happy to see Tesco arrive in catering? Tesco’s management team may have a lot on its plate, but the addition of Charles Wilson adds one of the smartest and most forward-thinking CEOs we know.

Charles Hall is head of research at Peel Hunt

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