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Tesco & Carrefour – Strategic partnership protecting wafer thin margins

All the big traditional supermarkets are trying to cut costs and improve profitability, as they adapt to an array of pressures and changes which are reshaping the industry. Grocers in Europe have come under pressure in recent years from the expansion of Lidl and Aldi, the German discounters that offer a narrower range of products bought in huge volumes at deeply discounted prices. Additionally, traditional grocers are under increased pressure from Amazon fearing the potential disruption it could cause in the grocery sector.

As efforts by traditional retailers to shore up market share lead to damaging price wars, with rising costs putting pressure on their margins, retailers have to think of new ways to keep customers while boosting profits. Therefore buying alliances have become increasingly common in Europe.

In July 2018, Tesco and Carrefour, Europe’s two largest supermarket groups, announced they will be joining forces to put the squeeze on suppliers in an effort to cut costs, as they step up their assault on Germany’s discount grocers. The combined buying power of Tesco and Carrefour is estimated at more than GBP80bn ($103.1bn) annually. Together, the group will hold an estimated 8% of the western European grocery market.

As consumers demand lower prices tensions have already been rising between retailers and suppliers. Tesco and Carrefour’s planned deal will most likely have a huge impact on the balance of power along the food chain, to the detriment of all suppliers, regardless of size. While the Tesco and Carrefour link-up could lead to more choice for customers, it will most definitely squeeze suppliers further.

Despite the lack of material overlap between Tesco and Carrefour, the planned deal has raised concerns with the French regulatory authorities, due to the size of the two companies. The impact of the purchasing alliance in terms of supplier reaction and consumer behavior is to be probed and could result in Tesco and Carrefour being asked to change the terms of their agreement.