Last week's announcement that the UK’s largest supermarket retailer is merging with food wholesaler Booker, valuing the latter at £3.7 billion, is one that has caught us (and presumably everybody else) with genuine surprise. Has Tesco just pulled off the most audacious deal we have seen for a long time? We analyse some of the key areas of this transaction which we believe have cause for the most excitement.
The deal will create the UK’s largest food business serving both the in-home (via supermarkets / c-stores) and out-of-home (mainly via Booker’s cash & carry and delivered foodservice operations) segments – a combined market size of almost £200 billion.
At a glance
We believe Tesco will be the biggest beneficiary of this merger, becoming the undisputed leader in the convenience retail sector:
- 8,300+ stores (across the Tesco Express, One Stop, Premier, Londis, Budgens and Family Shopper fascias)
- A convenience market share in excess of 28%, greater than the combined market share of the next two retailers – M&S Simply Food and The Co-op (source: Mintel)
On the cusp of shifting consumer trends
Securing such a deal at a time when consumer shopping habits continue to evolve away from larger, weekly shops towards more frequent, top-up shops at local stores (and online), is a strong move that should cement Tesco’s dominance in small format grocery retailing. Playing on the theme of convenience, Tesco could now have around 5,000 more local click-and-collect points for its products – penetrating even deeper into residential communities where the smaller Premier or Londis stores are typically located – further strengthening its omnichannel proposition.
Greater purchasing power
The enlarged scale of the combined group also offers greater scope to negotiate better purchasing terms for products, particularly important at a time of rapidly rising input prices across the sector. This should help Tesco/Booker to become even more price competitive for their customers across both the core retail and foodservice channels. Tesco will be able to increase price pressure on its closest multiple rivals, whilst helping to mitigate the ongoing impact from the rapidly advancing discounters.
Tesco will now have a significant presence in the delivered foodservice sector – a first for a UK multiple. The potential benefits are likely to be felt greatest for the majority of catering customers and small businesses – who form the bulk of Booker’s customer base in this channel. Several potential initiatives such as lower prices, more extensive ranges and further private label development, alongside a more comprehensive delivery infrastructure, are just some of the perceived benefits these customers could enjoy. Booker’s Chef Direct business also has over £100 million sales to nationwide chains such as Byron, Wagamama and Carluccio’s – providing Tesco with an indirect presence in the buoyant casual dining market, just over six months since it sold its Giraffe restaurant chain.
Potential benefits throughout the value-chain
There are also several other potential back-end enhancements that could be realised, the first being digital. Booker almost doubled its online sales (to £979 million) between 2011 and 2016, and we expect it to benefit significantly from Tesco’s considerable expertise in this area. Further efficiencies and enhancements to the online ordering process should enable Booker to step up its game against larger rivals Brakes and 3663. Potential integration of elements of Tesco’s banking and mobile operations (e.g. Its PayQwiq digital payment wallet) into Booker’s online platform offers an exciting range of possibilities.
A tricky road ahead
For all the excitement surrounding the deal, it will not be an easy ride from here on. The biggest stumbling block is the Competition & Markets Authority (CMA) which is undoubtedly salivating and plotting, as we write this, how they can steamroller this deal in the sake of consumers’ interests. We also expect a significant vocal outburst from independent retailers and the broader wholesale sector regarding the possible impact to their businesses as a result of this deal. The objections will be strong; the investigations searching; and the battle to get this deal over the line could be brutal for everyone involved.
Outsmarting the competition, or peaking too early?
Regardless, the rationale behind this deal is compelling: Tesco wants to remain true to its core as a food retailer, but in light of the structural changes facing the sector (the shift to convenience and the ongoing, and faster, growth in the eating out market) it wants a slice of the broader pie to secure its long-term strategy. Tesco still has much to do in its core business – its turnaround plan is still not complete – so the jury is out as to whether the timing of the deal is right. However, if it pulls it off, this could be the trump card that flummoxes its rivals and makes Tesco back in to the unassailable force it once was.
Harsha has extensive consumer expertise having started his career at retail consultancy Verdict Research, followed by roles within Datamonitor’s Consumer Markets team, before joining Livingstone in 2007. Harsha devotes all his time to working in Livingstone’s consumer and food & beverage sectors, which he also leads the deal origination programme for.