As Britain prepares to leave the European Union, it seems the UK’s largest supermarket chain Tesco (TSCO) isn’t prepared to give up on what it’s calling a "strategic alliance" with French retail giant Carrefour. The new partnership is the sum total of two years’ worth of negotiations, and while no formal agreement is set in stone, the two groups hope to finalise terms for a possible three-year deal within the next two months.
The two are hoping to leverage their combined scale to exert significant purchasing power when it comes to negotiating with global suppliers. As per the formal statement released by Tesco, the alliance should allow both companies to “improve the quality and choice of products available to... customers, at even lower prices”. It’s also claimed that the partnership should create “opportunities” for both local and national suppliers.
Times are changing – not just for the grocery sector at large, but also for Tesco itself. The group recently completed its acquisition of wholesaler Booker, while Sainsbury's has revealed its intention to pursue a possible takeover of Asda from US retail giant Walmart.
Traditional supermarkets also face increasing competition from budget chains such as Lidl and Aldi, as well as US online giant Amazon (US:AMZN). The latter recently bought upmarket, health-conscious grocer Whole Foods, and offers food delivery through its Fresh service across greater London and parts of the south-east.
It’s exactly this type of competition that is forcing supermarket chains to team up, rather than fight the battle in isolation. Analysts at Shore Capital also posit that the deal reflects both companies’ desire to curtail international expansion in markets such as China, by focusing instead on pan-European pricing power. The brokerage also reminds us that this isn’t a new concept: grocer Wm Morrison (MRW) is a member of the AMS Sourcing group, which represents and works for 10 European food retail groups. It’s also thought that while this deal could be positive for Tesco, the Booker merger has given it significant pricing power in the UK and some international markets, so this tie-up merely represents a bonus.
