Tesco - does everyone win?

There is, in fact, something for everyone in the merger announcement. Green lobby? Tick. The deal will, we are told, reduce waste. Suppliers? Tick. It will present a “broader market opportunity” whatever that means. 

And at the bottom of the announcement, consumers are there again. As well as delighting us the merger will “create attractive innovation opportunities” to serve us.
Mustn’t forget shareholders. They get synergies and some blah about Tesco retaining market leading retail and wholesale expertise. Tick! 

Yep, this £3.7bn cash and share deal is a win, win, win! And Tesco is trying very hard to make you believe it.

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Tesco deal

According to the Euromonitor data, if the merger completes, almost every third pound spent in convenience stores throughout the UK would flow into the pocket of the newly merged company, potentially drastically changing the landscape for those kinds of outlets.
In 2016, Tesco already had a market share of close to 17 per cent in the convenience stores sector, beating second-placed Co-operative Group, which had a 14.9 per cent hold.

Spar held 9 per cent of the market, with big brands Sainsbury’s and Marks & Spencer clocking it at around 8.5 per cent and 7.5 per cent respectively. Thanks to its ownership of brand like Budgens and Londis, Booker already boasted a market share of 10.7 per cent.
“The position of Booker as a supplier to so many of Tesco’s rivals may raise some difficult questions about the retailers power to potentially set wholesale prices and control the flow of goods to a number of smaller competitors,” he said. In order to avoid complications, the combined group may be forced to sell some parts of the business, like the Londis or Budgens chains, he added. 

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CMA and Tesco

Will the competition watchdog back the deal?

Tesco already controls nearly 30% of the UK grocery market – nearly twice as big as its closest rival, Sainsbury’s. It operates about 1,750 Tesco Express convenience stores and 780 One Stop outlets in the UK as well as more than 900 supermarkets.

The merger would give Tesco access to 5,400 more convenience stores in Booker’s brand groups and a further 2% share of the UK grocery market.

Tesco already has a 17% share of the convenience store sector, according to Euromonitor, and the merger with Booker would take that up to 27%. The Co-op, its nearest rival, has a 15% market share.

Tesco believes the merger will get the green light from competition authorities because it will not own the thousands of stores supplied by Booker. In theory, it would not be able to control prices in these stores as they are run and owned by independent operators. 
It may also be hoping that the regulator will look at the grocery market as a whole, rather than separating out the convenience sector. When Tesco bought T&S Stores, the owner of the One Stop chain, in 2002, the deal was cleared because regulators judged the convenience store market to be separate from the supermarket business. But its view may have changed.

However, the deal would add to Tesco’s already massive power with food manufacturers, farmers and brands.

What does it mean for shoppers?

In theory, Tesco’s better buying clout and more efficient operations should lead to lower prices for shoppers.

However, in some areas Tesco could control the supply of groceries and alcohol, not only to its own local supermarket and Tesco Express but to dozens of local independent convenience stores, cinemas and cafes. Such widespread power could reduce competition and keep prices high. 

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Why is Tescos buying Budgens owner?

What is Booker?

Booker is a grocery wholesaler supplying 125,000 independent convenience stores as well as 468,000 restaurants, pubs and leisure facilities such as cinemas.
The group employs 13,000 people, had sales of £5bn and made £155m in operating profit in the year to March 2016.
 
It is the UK’s largest cash-and-carry operator via its 172-store Booker chain and Makro, which has 30 outlets. Booker also controls the Premier, Londis, Family Shopper and Budgens symbol groups which make up about half of the retail clients it supplies. 
Premier is the largest branded group with 3,358 outlets, while Londis has 1,903, Budgens has 150 and Family Shopper 52. Booker doesn’t own these stores – they are all independently run and owned – but it sells them a large proportion of their stock and assists with marketing, IT and a whole range of other services making for a close relationship.
The group’s Booker Direct service also delivers grocery supplies to most of the major cinema chains, including Odeon and Cineworld, the national prison service and provides the limited array of non-own label food sold in Marks & Spencer.

Booker also supplies 450,000 caterers including major chains such as Wagamama, Carluccios and Byron burgers and 700,000 small businesses.

Booker opened its first store in Mumbai in 2009 and now has six wholesale outlets in India, where it also runs the Happy Shopper brand.

Why does Tesco want to buy Booker?

There are four main reasons:

• Shoppers are moving away from big supermarkets and locating suitable new sites for its Tesco Express and One Stop chains has become more difficult. Tesco wants to extend its reach by supplying thousands of independent convenience stores.
• Buying Booker would also take Tesco into catering supplies – a new fast-growing market as people increasingly opt to dine out or eat takeaways rather than cook at home.
• If the deal goes through Tesco will have access to more than 5,000 corner shops where customers can pick up goods ordered online or access Tesco services such as banking and its mobile phone network.
• The merger will give it more clout with suppliers and cut costs by merging distribution and other operations. Analysts estimate Booker will add about £2bn-£3bn to Tesco’s current £45bn of buying power. Meanwhile, Tesco estimates it will save £175m a year in costs, £96m of which will come from improved procurement.

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