Waaaagaaamaaamaaa – Tesco and Booker spring a surpise (perhaps)

I read something the other day whereby the author noted that such was the bad news coming out of this government and the USA so far in January, they were getting nostalgic for the calm and reason of 2016. When I put the radio on in the morning I must admit to a feeling of dread over what next stupidity the Orange one has got up to.  Today that was heightened by the thought and images of the rather distasteful love-in going on in Washington.

And then … What did he just say? Tesco, Booker. What the … Where did that come from?

tesco-and-booker-1

Source: Shareholder Presentation – see tesco.com

A little while ago I likened Tesco to a supertanker, and then the real problems surfaced and then seemed to get worse, though at least by then there was some sense of a plan to put things right. For about 18 months I have not really thought too much about Tesco, just watched as things seemed to stabilise and then get rather better. Not the Tesco of old, but at least, to continue the metaphor, on an even keel, and perhaps moving forward.

And then this!

Whatever the outcome, Tesco certainty has its swagger and mojo back. A merger (read takeover) into the wholesaling sector, which seemed to come out of nowhere.

As the figure above makes clear the logic from the corporate side seems quite simple. Tesco point to the relative stagnation of the in-home retail market and the growth in the out-of-home sector. By getting a piece of that action, coverage and growth may be enhanced. As with any merger (takeover) there are the promised synergies and cost savings – here derived from better buying, distribution and some central savings.

The merger documents and the press announcements and commentary point to these benefits but also highlight the opportunities for technology, suppliers reach, new product development, reduction in food waste and better service to the Booker supported stores through enhanced use of the delivery fleet. We could also think about the potential for better pricing in these stores. There may also be some scope for better use of the redundant space in many Tesco Extras – perhaps cash and carry lines or some of the food service brands supported by Booker. As the diagram below suggests the aim is to use multiple channels to reach the changing consumer, well supported by a strong back office and development/technology/distribution operation.

tesco-and-booker-2

Source: Stakeholder presentation – see tesco.com

This all seems very positive and indeed potentially game changing.

So, where’s the catch?

Well, on the radio Dave Lewis was very keen to point out that this does not mean Tesco are getting any more stores. So there’s no competition authority interest; right? We will see about that of course. Booker support directly c3300 Premier stores and c1900 Londis as well as the Budgens fascia. What does this mean for them? Whilst Tesco already owns and supports One-Stop, this is a step up in terms of numbers and potentially influence.  To what extent will the CMA look at control as opposed to ownership?

But, there is another way of thinking about this. The deals with Booker by independent retailers can be resigned from, so we might see more flux in the market from those that are unhappy with the likely effects, real or perceived. Some reaction may of course be emotional – they have spent their life fighting Tesco for consumers and are now expected to have at least a group hug. There will be quite a few concerned retailers. But others might see possibilities. With Tesco updating technology, adding possibilities, expanding click and collect, Clubcard and banking, potentially providing a much enhanced delivered service as well as refreshing the product range and battering down suppliers on price, the offer in the new group might look very attractive and highly competitive. There is a long way to go both in regulatory and practical terms before the effects are fully understood.

The change in retailing driven by the consumer market and its changing demands is taking us down interesting roads.  The rise of F&B and the focus on convenience have been known for some time, but today’s announcement is a major step in a potential reshaping of the vertical supply chain. Whether it sticks we shall see, but as a statement of intent and of some clear strategic thinking, it shouts, Tesco is back on form.

 

 

 

About Leigh Sparks

I am Professor of Retail Studies at the Institute for Retail Studies, University of Stirling, where I research and teach aspects of retailing and retail supply chains, alongside various colleagues. I am Chair of Scotland's Towns Partnership. I am also a Deputy Principal of the University, with responsibility for Internationalisation and Graduate Studies.
This entry was posted in Association of Convenience Stores, Booker, Click and Collect, Competition, Competition and Markets Authority, Consumer Change, Consumer Lifestyle, Convenience stores, Food and Beverage, Food Retailing, Mergers, Restaurants, Retail Change, Tesco, Wholesaling and tagged , , , , , , , , , , . Bookmark the permalink.

11 Responses to Waaaagaaamaaamaaa – Tesco and Booker spring a surpise (perhaps)

  1. Steve Wood says:

    I have a feeling that the CMA will be all over this one – but I am probably wrong as presumably Tesco has already run the scenarios on the extent on regulatory kick-back and factored them in…? Interesting though. It also reinforces the recent direction of travel at Cheshunt – away from glamorous overseas adventures and back to ‘meat and potatoes’ (literally) in the home market.

  2. Leigh Sparks says:

    It would surprise me if they are not. You are right about the focus as well. Dobbies kept running through my mind this morning though.

  3. Nelson Blackley says:

    Interesting times (as always) in UK retail.
    Leigh – did you see the piece in the Telegraph business section which was full of praise for the Booker CEO Charles Wilson, suggesting he was the biggest coup for Tesco from the merger, given his track record in successful aquisitions at Booker – historically an area of relative weakness for Tesco. He now joins the Tesco board and is immediately being touted as Dave Lewis’s heir apparent as Tesco CEO.

    • Leigh Sparks says:

      Nelson – some interesting pieces in the press over the weekend. Most seem to think CMA will have to take a close look but unsure as to boundaries. Another full review of grocery market might have been on the cards but in this economic situation?

      Interesting how external talent making the waves at Tesco now.

  4. Nelson & Leigh, maybe just as ‘interesting’ was the article, ‘Somebody is off their trolley’ by Alistair Osborne in Saturday’s The Times. He points to the resignation of Richard Cousins, the senior independent member of the Tesco board. That was reportedly for the not insignificant reason that Cousins felt ‘he couldn’t fulfill one requirement of his job as Tesco’s senior independent director; selling the deal to investors. There are of course the usual merger ‘promised synergies and cost savings’. But how often does the legacy ever match up to the hype and promise in such large mergers? I’m unconvinced by the Tesco move because a merger would create immense culture change strategy and management challenges.. That ups the ante on what remains a significant ‘jury is still out’ on Tesco. That is its governance and strategic management competencies – set against the elaborated complexity the merger will, at an instant, create. Perhaps relevant to this aspect is a recent PwC article via Strategy & Business; ‘Banking’s biggest Challenge; it’s Own Strategy’. The core finding was that ‘Less coherent banks took longer to recover after the financial crisis.’ I’ll stay ‘on the trolley’ for now regarding the corporate capacity of Tesco to render greater coherence out of a greater complexity.

  5. Leigh Sparks says:

    Edward
    I do wonder though whether the issue with Richard Cousins was also because of his other business links (Compass), which meant the move into Booker created a potential competition issue for him, as Booker supply competitors (my assumption). The issue about synergy is as you say well recognised, but in many of the pieces I have seen there seems to be a view that the synergies promised are actually rather limited and will be easily achievable. Like you though I am a little sceptical other than costs reductions. Leigh

  6. Leigh Sparks says:

    Thanks for posting the link. Time will tell about CMA of course.

  7. Pingback: Tesco, Booker and Poundland | Stirlingretail

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  9. Pingback: Talking Tesco (Again) | Stirlingretail

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