From October the two companies will look to use their combined purchasing power with global suppliers to drive down buying costs. The alliance also covers sharing their joint-brand products, giving Tesco and Carrefour more control and the likelihood of higher price margins. It is another response to the changes in the grocery retail market, particularly the pressure from budget retailers such as Aldi and Lidl, one in which Tesco recently purchased the wholesaler Bookers for £3.7bn.
The strategic alliance has been under discussion for two years and will combine the purchasing power of both the UK’s and Europe’s largest retailers. With combined sales of £127bn and a combined workforce of over 800,000 the alliance is also a direct response to the proposed merger between Sainsburys and Asda. Tesco have improved performance after recent setbacks and recently posted their 10th consecutive quarter of increased sales. French giant Carrefour are implementing their own reforms which aims to reduce costs by €2bn by 2020 while investing €2.8bn in to e-commerce.
Tesco and Carrefour say the alliance will be good for their customers as they will not only see cheaper prices but improved quality and choice. Yet the increased buying power of alliances may not be such good news for the suppliers to the food retail industry, who will come under increased pressure on pricing. The vast global suppliers such as Unilever and Nestle may be able to withstand these pressures to a large degree, but smaller, local producers who have products stocked in the major national chains may have concerns. However Tesco have tried to reassure local suppliers they should not be concerned about this alliance and they are not in their sights as part of the drive for efficiency savings. Instead local suppliers should remain excited about getting their product into a national retailer such as Tesco.
The budget supermarkets have made it tough of late for the established players like Tesco and Carrefour. Their model of basic stores stocking largely own-brand ranges has made it difficult for the traditional food retailers to match them on price. With this strategic alliance, Tesco and Carrefour, who only compete directly in the Eastern European market, hope to create the buying power to challenge.
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