Carrefour, Tesco in global pact to keep suppliers' prices down

Shoppers at a Tesco supermarket in London. Tesco faces a threat to its market leadership in Britain after second-ranked Sainsbury's agreed to buy Walmart-owned Asda, the No.3 player.
Shoppers at a Tesco supermarket in London. Tesco faces a threat to its market leadership in Britain after second-ranked Sainsbury's agreed to buy Walmart-owned Asda, the No.3 player.PHOTO: EPA-EFE

Bid to cut costs amid rivalry from online and discount chains; suppliers fear getting squeezed

PARIS • Europe's largest supermarket groups Carrefour and Tesco have agreed to form a global purchasing alliance to demand better terms from major suppliers, in the latest attempt by the industry to cut costs.

With combined annual sales of US$170 billion (S$233 billion), the partnership is designed to secure lower prices from the likes of Nestle, Procter & Gamble, Unilever, Danone and others to help the French and British groups stay competitive at home and abroad.

The announcement marks the latest reinvention in an industry grappling with the rapid move online, competition from discount groups such as Aldi and Lidl, and the looming shadow of American Internet giant Amazon.

Analysts said the combined firepower should help Carrefour, which has lower margins than Tesco, but warned it could lead to a spiralling price war.

Suppliers said it posed a threat to their survival.

"This... combines the purchasing expertise of two world leaders, complementary in their geographies, with common strategies," said Carrefour chief executive officer Alexandre Bompard.

The alliance will cover strategic relations with global suppliers in areas such as marketing services or data collection, as well as the joint purchasing of own-brand products and goods used in their businesses, Carrefour said.

The alliance, which will be formally agreed upon in the next two months, is unlikely to include fresh food products, as each company will continue to work with supplier partners at local and national levels.

Financial terms were not disclosed.

The companies said the alliance would be governed by a "three-year operational framework".

"By working together and making the most of our collective product expertise and sourcing capability, we will be able to serve our customers even better, further improving choice, quality and value," said Tesco CEO Dave Lewis.

Mr Lewis joined Tesco from Unilever, where he ran its personal care division.

Analysts at Jefferies estimated the deal could lead to initial total savings of £400 million (S$719 million).

"More generally, we wonder whether the advance of players like Amazon and the German discounters (businesses underpinned by truly global supply chains) will continue to force a drastic change in sourcing processes," they said.

European groups Auchan Retail, Casino, Metro and Schiever agreed to their own purchasing partnership last week.

Tesco faces a threat to its market leadership in Britain after second-ranked Sainsbury's agreed to buy Walmart-owned Asda, the No.3 player. It said last month it would cut food prices to stay ahead of rivals.

REUTERS

A version of this article appeared in the print edition of The Straits Times on July 03, 2018, with the headline 'Carrefour, Tesco in global pact to keep suppliers' prices down'. Print Edition | Subscribe