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Twenty questions: Would a Tesco–Booker deal help or harm independent food retailers?

  1. Tesco–Booker deal merger
    Christian Annesley

    Christian Annesley Contributor Full Member

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    There’s growing speculation over the recently announced plans for a takeover of the cash-and-carry wholesaler Booker by Tesco. Arguments are being developed on all sides about what the deal, in all its complexity, would mean for independent food retailers in particular. Christian Annesley rounds up the main discussion points a few days into what promises to be a protracted period of debate.

    Ten days on from the first announcement on 27 January, more and more questions are being asked about the implications of the announced plan for the retail giant Tesco to buy the wholesaler Booker for £3.7bn (it’s being called a merger, to reflect the separation between the businesses post-deal).

    Why so many questions? Mainly because the landscape of the grocery sector deal is complex, with the fit between Tesco’s activities and Booker’s cash-and-carry wholesaler trade being relatively hard to unpick.

    Here’s our run-down of twenty questions about the possible merger.

    What’s Booker? Booker is a cash-and-carry wholesaler that supplies food to 120,000 independent retailers nationwide. It has 172 depots, plus 30 under the Makro brand, where small business owners can buy goods in bulk. Booker also owns the Londis, Budgens and Premier brands, which operate on a franchise basis.

    The franchise model means the shops are independently owned and run by small business owners who pay Booker for the branding, for access to certain products and deals, and for IT and logistical support. The buying group also keeps costs down for the independents. Plus it generates roughly a fifth of its £5bn annual sales from its Booker Direct online service, which counts some major cinemas and Marks & Spencer among its customers.

    Why is Tesco buying Booker? It’s a shortcut into the convenience market, which has been the fastest-growing part of the grocery sector for several years. The tie-up with Booker would add 5,400 stores to Tesco’s existing network of 2,900 small shops, which operate under the Tesco Express, Metro and One Stop brands.

    What about food service? Booker does food service too, in a big way. This gives Tesco a route into the food service business – this is a new area for Tesco, but it accounts for a third of Booker’s sales.

    A win-win? Shareholders in Tesco and Booker like the deal. Tesco reckons it can save £200m a year with Booker on board, and boost annual profits by £25m after three years. And Tesco claims the tie-up is a win for others, too: it believes it will give its suppliers more customers to sell to while giving independent retailers more choice. It also thinks it can cut down on food waste by making the supply chain from farm to retailer more efficient.

    Will it get past the competition watchdog? Tesco is already far and away the biggest player in the grocery industry. If the deal goes through, Tesco’s share of the convenience retail market will jump from around 17% to 28%, according to Euromonitor. Its share of the total UK grocery market could rise by a further 2%.

    This could be the focus of an investigation by the Competition and Markets Authority, which would explore Tesco’s dominance.

    What competition is likely to oppose the deal? Expect the likes of the Co-op, Spar, Nisa and Costcutter to wade in if there’s an investigation.

    Are more people spending on eating out?  Yes, and Tesco is using Booker to get a bigger slice of the £85bn ‘out-of-home’ market. It sees that as growing faster than ‘in-home’ eating.

    What about where stores overlap? Tesco may try to sell some stores where there are a few in the same location – but first, it is likely to watch shopping habits over the next few months.

    Can Tesco sell off franchised stores? No, but it could choose not to renew agreements with retailers.

    What are the upsides to the deal? Booker boss Charles Wilson points to the potential offered by Tesco’s fresh food offer. The combined business will also have a network of 8,000 click-and-collect points.

    How vulnerable are independent retailers that use Booker? Retailers appear vulnerable in that they will hand yet more power to Tesco if they stay with Booker.

    What’s the connection with restaurants? That’s through the food service business. High street restaurants such as Wagamama, Byron Burgers, Carluccios and Loch Fyne are supplied by Booker – so the deal gets Tesco into this restaurant supply space.

    Who is worried about the deal? One. The Farmers’ Union of Wales says there already “well-recognised” concerns about the balance of power along the supply chain being loaded in favour of the major retailers. “Any moves which increase such imbalances are a great worry.”

    Who is worried about the deal? Two. The Association of Convenience Stores is among those that have said it will lobby the Competition and Markets Authority. It wants to make clear the pressures this deal could place on rival convenience stores like Nisa and Spar.

    What does Booker say? One. CEO Wilson says the benefits to independents will include improved choice. “Tesco has got a very good range. We can tap into that can help us make sure we’ve got exactly what we need for all our independent retailers. We’ve made good progress on service, but by combining delivery we can do an even better job of making sure trucks are spending their time delivering rather than driving around.”

    What does Booker say? Two. Wilson says more scale will give better prices. “And we can continue to improve quality – particularly fruit and vegetables.”

    What does Booker say? Three. Wilson says Booker doesn’t hold its customers to big contracts, so it has to earn any business. “You do that by doing a better job than anybody else. It’s entirely down to them, but I think once we’ve told the retailers the story properly they’ll say that Booker Group with Tesco is what they want to back their business.”

    How involved will Tesco be in independent retail? Wilson says there is “not a chance” of Booker retailers becoming mini-Tescos.

    How will changes be communicated to retailers? There will be a roadshow for Londis, Budgens, Premier and Family Shopper retailers to take them through the plans.

    When would a deal to go through? Early 2018 is being talked about.