Christmas has come early for Tesco and Booker chiefs
Full marks to Tesco and Booker and their army of highly paid legal advisers. It just goes to show that if you’re the biggest retailer in the land, getting even bigger is no problem. That at least seems to be the bizarre message from the competition watchdog, yesterday rebranded as the “comedy markets authority” by wags at Shore Capital.
It’s fair to say that maybe only Tesco and Booker’s “Chas and Dave” were so cocksure about the deal sailing through regulators without any conditions. The rest of the industry was anticipating the CMA demanding either the sale of hundreds Tesco Express shops or a remedy to dispose of Tesco’s One Stop chain. The boss of rival convenience chain McColls was positively licking his lips about snapping up lots of shops in the highly anticipated fire sale.
But no. While the CMA found it necessary to drag its heels over Poundland’s takeover of 99p Stores, request disposals in Lloyds Pharmacy’s £125m deal for 277 Sainsbury’s pharmacies, and asked Vision Express to sell three sites in its acquisition of Tesco’s opticians, it has given a provisional green light to the £3.7bn Booker deal that will turn Britain’s biggest retailer into the UK’s “leading food provider”. Bosses Dave Lewis and Charles Wilson can now pass “Go” on the monopoly board and collect the millions of pounds in share rewards they will reap.
The issue with this provisional green light from the watchdog is that the CMA seems to have swallowed Tesco’s line that there’s no problem with the takeover because it “doesn’t add stores”. The bulk of Booker’s convenience shop brands of Booker, Londis, Premier and Happy Shopper are instead run by franchisees. So, on a simplistic property analysis, the CMA said there are only two neighbourhoods where there was a Tesco convenience shop overlapping with a Booker’s owned shop, rather than looking at the other 5,000 shops with a Booker brand above the door.
The CMA says that Booker’s franchisee shopkeepers have the freedom to switch their supply chains if they don’t get a good deal from Booker. But the CMA has minimised the level of influence an enlarged group will have on pricing and buying arrangements, which require shopkeepers to order a certain percentage of goods from Booker to use one of its brands. And after this deal those shopkeepers will be supplied by Tesco, the very retailer that has threatened livelihoods by opening rashes of Tesco Express stores across the country.
Instead, the CMA focused its analysis on an illogical theory that Tesco might be incentivised to worsen Booker’s offer to divert shoppers to the supermarket’s stores. Unsurprisingly, Tesco batted that away by arguing there would be little commercial logic in lowering sales in one half of its business.
Meanwhile, the CMA reckons that Booker’s 20pc share of the wholesale market is not enough to trigger concern. Even when put together with Tesco’s 28pc share of the grocery market to create a food giant with £60bn of sales. That’s because, according to the CMA, the wholesale and retail market is very different. But have they not heard of Tesco’s plans to put Booker’s cash and carry counters at the back of the supermarket’s vast Extra stores? That’s a blurring of markets right there. The CMA says there’s enough competition in the wholesale market to survive the shake-up from the deal, and cites Morrisons’ recent deal to supply McColls and the Co-op’s bid for Nisa as evidence of the changing market. They didn’t include the fact that both those arrangements have been struck in the wake of Tesco’s Booker announcement as the industry scrambles to react.
What’s odd is how silent suppliers have been during the CMA’s investigation, giving the impression that they’ve given two thumbs up to the deal. Firstly, I’m told by two branded suppliers that they don’t want to risk their relationship with their biggest customer, Tesco, by speaking out. The level of power Tesco has over them just got bigger with the addition of Booker, but the CMA doesn’t seem to mind that. Secondly, suppliers to Booker are actually hoping that the deal means the wholesaler will be regulated by the Grocery Code Adjudicator, like the supermarkets, which could improve strained relationships and supply terms.
To give the regulator an ounce of credit, it has, for the first time, included discounter Aldi and Lidl into its analysis of the grocery market rather than their previous thinking that the cut price chains were in a separate universe. This shows at least the understanding that not only do shoppers now make small, frequent trips to convenience stores rather than weekly pilgrimages to vast stores, they are also entirely fickle about where they shop to get a bargain. Supermarket loyalists are a dying breed.
This is good news for future consolidation efforts in the supermarket sector. With profit margins under intense pressure from rising costs and a race to invest in online and convenience offers, we could see more tie-ups. Now the competition watchdog understands that Aldi and Lidl – who together control 11pc of the grocery market – play in the same field as the “big four”, more deals could be on the way.
‘Only ‘Chas and Dave’ were so sure about the deal sailing through regulators’