Suppliers shake as Tesco plans buying alliance with France's Carrefour

Tesco has agreed to form a alliance with French supermarket peer Carrefour to group their buying power together to squeeze prices even lower in the face of competition from discounters such as Lidl and Aldi.

Initially imagined as a three-year entente cordiale, the alliance will cover the "strategic relationship" with global suppliers, the joint purchasing of own brand products and goods not for resale. The pair said that formal agreement of the deal is expected by the end of August.

Tesco is clearly concerned by the increased potential buying scale of a combined Sainsbury’s and Asda, analysts said, with all supermarkets in Europe concerned about the idea of Amazon making more ambitious moves in the grocery market.

Tesco said the alliance "will enable both companies to improve the quality and choice of products available to their customers, at even lower prices", which is likely to cause alarm for suppliers.

Listed suppliers to Tesco range from Unilever, AB Food, Bakkavor, Greencore, Cranswick, Dairy Crest, Hilton Food, Premier Food and McBride. However, the FTSE 100 group insisted that the agreement, which will see the pair continuing to work with their supplier partners at a local and national level, will allow both companies to "strengthen their relationships with their suppliers" and create "significant opportunities" for those suppliers.

Looking at McBride, which supplies both Tesco and Carrefour, analysts at broker Peel Hunt noted that it "will be subject to risk of having tighter buying terms, particularly if there are differences in pricing".

But on the other hand, the analysts suggested it "may also provide opportunities given that the company has an excellent relationship with Tesco, where McBride has sole supply on a wide number of lines and the company is seeing a stronger performance in the UK than in France".

Tesco chief executive Dave Lewis said: "By working together and making the most of our collective product expertise and sourcing capability, we will be able to serve our customers even better, further improving choice, quality and value."

Carrefour boss Alexandre Bompard said it was a "major agreement as it combines the purchasing expertise of two world leaders, complementary in their geographies, with common strategies. This agreement is a great opportunity to develop our two brands at the service of our customers".

Shares in Tesco fell initially but were in positive territory by mid-morning at 257.3p, while some suppliers' shares were sent sliding, with McBride down 2%, Bakkavor and Hilton Food down 0.8%, Unilever down 0.7%, Cranswick down 0.5%.

Dairy Crest was up 1% however, Premier up 0.6% and Greencore up 0.5%.

"Although Tesco has only just completed its acquisition of Booker, management clearly felt that they had to respond to the Asda-Sainsbury tie-up, which promised to lower prices for every day items," said market analyst Neil Wilson at Markets.com.

"But there is the inherent contradiction of that deal in this partnership too in that they talk about strengthening relationships with suppliers and delivering lower prices at the same time, the kind of logic that is designed to assuage competition authorities but leaves sceptics unimpressed.

"However the great advantage with the Tesco-Carrefour tie up is that it won't impact the UK market directly in the way that Asda-Sainsbury's would. Again Dave Lewis seems to be navigating things very well in first selecting a wholesaler (Booker) and now a foreign giant (Carrefour) and so avoiding undesirable run-ins with the CMA. Tesco cannot really do any more deals in the UK so a foreign partner makes sense."

Broker Shore Capital felt the tie-up was unlikely to be a ‘game-changer’ but did wonder if a formal alliance of two national market leaders might be "enough to pique the interest of European regulators".

A key focus of the tie-up is to reduce prices on own-brand products, which makes this partnership more of a direct response to Aldi and Lidl, whose offers are heavily weighted towards own-brand, said Patrick O’Brien, UK retail research director at GlobalData. "Tesco and Carrefour have both struggled to match the discounters on quality and price, and the alliance should help it compete."

For suppliers, this is another signal of battles ahead, O'Brien added. "Sainsbury’s and Asda have made it clear that it will target its largest suppliers for cost reductions by flexing their increased scale, and Tesco and Carrefour will look to do the same while reducing the number of branded products they sell as they increase their own-brand ranges.”