Make Tesco pass on savings to shoppers
Watchdog under pressure to act as Booker merger creates £59billion grocery monolith
TESCO’S surprise £3.9billion takeover of cash and carry group Booker has ‘alarmed’ suppliers. It will see the supermarket’s tentacles reach into thousands more stores and almost half a million pubs, restaurants, canteens and other food outlets, critics have warned.
The deal last night led to calls for a competition probe and for the grocery watchdog to receive new powers. One senior retail figure suggested Tesco could be required to guarantee savings would be passed to shoppers as a condition of the deal.
But, despite industry fears, the City welcomed the deal, which will create a £59billion turnover business and allow the combined group to make cost savings of £200million a year. Tesco’s stock market value soared by £1.5billion on the news.
Analyst Dave McCarthy, at HSBC, described the pairing of Tesco’s Dave Lewis and highly respected Booker chief executive Charles Wilson as a ‘dream team’. He said the cost savings could exceed £600million a year in the longer term.
Tesco already has more than 3,500 stores and controls almost 30 per cent of the food market, while Booker is the leading wholesaler to thousands of small shops, and owns the Londis, Budgens and Premier chains.
Analysts estimate that the deal would hand Tesco another 2 per cent of UK grocery sales – which could be too much for the Competition & Markets Authority to tolerate.
The proposed acquisition would also make the newly expanded Tesco a major wholesaler to about 125,000 independent food stores and other small retailers, as well as 468,000 pubs, restaurants, leisure facilities and caterers supplied by Booker.
The deal will give Tesco far greater negotiating power with suppliers, many of whom are asking for higher prices from supermarkets to cover the painful effect of the falling pound. Tesco’s row with Unilever over the price of Marmite last year was the most public of many spats over price.
Lewis said the deal with Booker would not add to the number of Tesco-branded stores and did not threaten suppliers. He said he had already received endorsements for the deal from suppliers and food producers, without giving names.
He added: ‘Over the past two and a half years we’ve changed com- pletely how Tesco wants to engage with its suppliers. We’ve been very open and transparent about how we want to build the business together and share the benefits. We’ve also seen how suppliers have rewarded us in surveys, saying we are their preferred retailer to deal with.’
When pushed on tensions that might result from the deal, he said: ‘While some of what you suggest may be historically relevant, I don’t think it’s where we start from now.’
But one rival grocery executive said suppliers would be ‘alarmed’ at the prospect of a fresh squeeze on profit. ‘Tesco always had the muscle – now they’ve got even more. Not just with small suppliers but with the big ones like Coke,’ he said. ‘I can’t see there’s much front-end logic to this at all – it’s all back office. The extra profit is mostly coming out of the suppliers. There will be areas where they could have more than 50 per cent of the business into the UK on certain branded products.’
One former grocery market executive said: ‘You can bet your life that the supply base will be complaining. This deal has been incredibly well received by investors, but I am surprised Dave Lewis has been so blasé about competition issues. During the last Government supermarket inquiry, the main concern was that the power balance between big food retailers and their suppliers meant supermarkets might do things that were against the interests of consumers – most notably around range and choice.’
That inquiry led to the creation of the Grocery Code Adjudicator, a watchdog intended to ensure fair treatment of suppliers by big supermarkets. Its powers, however, do not extend to a wholesaler like Booker.
Supermarket sources said the role of the adjudicator would need to expand. The source said: ‘The main rationale for this merger is to reduce the cost of goods and of buying, so I don’t think it’s beyond the Competition and Markets Authority to ask for reassurance that some of it might be passed on to consumers.’
But sources familiar with the watchdog’s remit said direct controls on pricing could be difficult to enforce. The CMA declined to comment.
The deal has solved a mystery – the sudden resignation this month of Tesco non-executive director Richard Cousins, also head of catering and food service group Compass.
Tesco admitted on Friday that Cousins’ decision was due to the Booker deal, but would not elaborate. Cousins’ spokesman did not respond to calls for comment, but he is likely to face questions on the matter at Compass’s annual meeting on Thursday at Twickenham rugby ground.
Tesco investors are likely to be in the scrum to get in.