Tesco poised to tap growth in convenience, on-the-go and food services in Booker deal

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Tesco is poised to tap into the growth in convenience and food service through the Booker deal announced today, according to leading retail commentators. The acquisition of a leading wholesale operation is also set to drive improved terms, analysts claim; with one suggesting the deal also ushers in a future Tesco CEO in the Booker boss.

Catherine Shuttleworth, CEO at Savvy, said the takeover made good business sense. “Even though Tesco is getting back in its feet, growth in the core UK grocery market is set to be limited over the next few years,” she says. “Growth in convenience, on-the-go and food services meanwhile remains buoyant and we see a lot of opportunity for innovation. There are many synergies between these complementary businesses and the economies of scale from the deal will help the merged group remain competitive as we enter a period of higher price inflation.”

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Iona Carter, director at independent shopper research agency, Shoppercentric!, said the move reflects Tesco’s recognition that grocery shopping habits are changing. “Big shopping trips are in decline, as shoppers increasingly either drop them completely or move them on-line; conversely, smaller basket shopping trips are on the increase – which is where the convenience sector can cash in,” she said. “Extending its reach into this channel by supplying the independent sector can only be a good thing – they will cease to become competitors in the traditional sense. It is also a lower risk foray into the out of home channel – but it will be interesting to see how the fortunes of this channel will play out in the Brexit climate as consumers and shoppers start to tighten their belts once more.”

For Professor Alan Braithwaite, chairman of supply chain and logistics consultancy, LCP Consulting, the big win is that it takes Tesco into the food service arena, which is the food growth market. “People are eating out and institutional catering is still growing. It will give the business the platform to further challenge in that market. It will allow the Booker side of the enterprise to leverage procurement and inventory so there is a margin opportunity too. This is especially important in the light of food inflation that is now accelerating with the weaker pound,” he said.

Jon Copestake, retail analyst at the Economist Intelligence Unit, said the wholesale acquisition will help Tesco to move further up the supply chain, increasing the retailer’s buying power with producers and enabling it to deliver more competitive prices to consumers, which is especially prescient given the fears over rising prices and more complicated supply chains that have arisen from last year’s Brexit referendum.

Gary Hobbs, senior equity analyst at Investec Wealth & Investment, agreed. “It takes Tesco much further into wholesale, giving greater certainty of supply and allowing it to extract better terms,” he said.

But the deal is not without its challenges, according to Copestake. “Obtaining shareholder approval should be relatively easy but regulatory approval may be more difficult to come by. Although Tesco CEO Dave Lewis has stated that this is not a case of Tesco buying more stores, it does cause ripples through out the retail supply chain. Not only do Booker’s own retail units like Londis and Budgens represent competitive hurdles, but the position of Booker as a supplier to so many of Tesco’s rivals may raise some difficult questions about the retailer’s power to potentially set wholesale prices and control the flow of goods to a number of smaller competitors. While Tesco seeks to simplify its own supply chain and realise wholesale synergies, it is likely that the supply chain of smaller rivals will become more complex and it seems likely that some form of divestment such as the sale of the Londis or Budgens chains may also be required.”

Hobbs agreed having so much of the convenience market in the hands of a single player is bound to raise issues, even though Dave Lewis was confident on the call of limited CMA interference as Booker doesn’t own the stores (all franchised) and where Tesco will have no influence over pricing.

“Charles Wilson is seen as a major capture for Tesco and already touted as Lewis’s heir apparent,” he added.