Aside from your standard 20% off and buy one get one frees that you see as you walk the aisles of supermarket chain Tesco, their corporate office has recently announced a deal with the grocery wholesaler Booker. You may have never of heard of them, but they are the UK’s leading food wholesaler, responsible for supplying 296,000 catering businesses and 72,000 independent retailers as well as owning Londis, Premier and Budgens.
Tesco is the UK’s biggest supermarket with a market share of about 28% whilst Booker is the largest. The proposed merger from Tesco, valued at £3.7bn has been met with significant opposition from seven of the other largest UK wholesalers who are calling for the market’s competition watchdog to block the deal outright.
Is This Deal Fair?
The seven argue that if the proposed deal were to occur, then wholesalers would be disadvantaged as they cannot match Tesco’s dominance in the grocery sector, that is only set to grow following the merger. The largest potential issue that concerns these wholesalers is that, if the deal goes through then Booker will be able to purchase is produce at the same rate as Tesco, taking advantage of its massive scope and buying power. This will allow them to undercut their competition in the wholesale market, which will reduce business for all involved in the grocery market from cash and carries to wholesalers out of business.
Suppliers of branded products are also expected to be impacted by the merger. With Tesco and Booker’s newfound market dominance, suppliers are likely to fail if their products are unable to be on the shelves of their stores. Aware of this potential risk and failing of selling products, producers and suppliers may be forced to trade on unfair terms preferential to Tesco, at the cost of their business. This could involve rebates, lower prices and contribution to marketing, just to guarantee their products are on Tesco’s shelves yet cutting into their profit margins.
So What’s Happening…
The Competition and Markets Authority has provisionally allowed the deal to go through. They state in their findings that the deal going through could potentially increase competition in the wholesale market and reduce prices for shoppers. The CMA recognised sufficient difference between the activities of Tesco and Booker, stating that their markets do not overlap in most commercial activities. For example, 30% of Booker’s revenue comes from their supply of caterers, which is something Tesco is not involved in.
The CMA concluded that “Booker’s share of the UK grocery wholesale market, at less than 20%, was not sufficient to justify the longer-term concerns” presented by the bosses of the other seven retailers.
Tesco and Booker argue that by using Tesco’s wider purchasing ability to produce cheaper goods, this will be passed on to consumers at cheaper prices for Booker’s wholesale activities, which may even be beneficial. However, price competitiveness comes at the cost of competition as Booker may potentially undercut the market, reducing the business of its competitors creating a monopoly on the fruit and veg market.
The trade of groceries is often overlooked but it is a constantly changing market. Tesco, despite remaining the market leader, is losing its market share to the extraordinary growth in popularity of budget supermarkets such as Aldi and Lidl. In addition to this, we must also look at the future. Amazon’s recent purchase of Wholefoods looks like fruit and veg could be seeing massive transformation under the hands of the e-commerce giants. The proposed takeover from Tesco is set to complete in early 2018, we can wait and see what happens, but in the meantime let me ask you: Do you think this takeover is fair, and what do you think we can see for the future of this essential business.