Stirlingretail

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?

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.

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.