The Tesco and Booker merger set the c-store sector on a course of consolidation, sparking a flurry of supply deals and takeovers. C-Store asks retailers their views on how they see the activity affecting their businesses
2018 will be the year that consolidation becomes reality. Last January Tesco and Booker proposed a merger which sent shockwaves through the industry and set the direction of travel for the year ahead. With competition more intense and multi-faceted than ever before, symbol groups and independents realised that greater scale was the key to taking on the multiples, discounters and internet giants such as Amazon.
As such, Nisa began talks with Sainsbury’s before accepting a takeover offer from the Co-operative Group, which members voted in favour of in November. Meanwhile, as Costcutter Supermarkets Group was finalising terms for a supply deal with the Co-op, its supplier Palmer & Harvey collapsed into administration. P&H’s collapse offered a stark illustration of how the status quo was becoming increasingly unsustainable.
What it all means to independent retailers will become clearer as the year unfolds. What is known is that a wide range of convenience groups will be affected by the first wave of consolidation: the Booker-Tesco merger directly impacts Londis, Budgens, Premier and Family Shopper store owners, while the Co-op will be supplying Nisa, Costcutter, Simply Fresh, and Mace retailers. Meanwhile, Morrisons will be the main wholesale supplier to McColl’s outlets.
Barrie Seymour, a Londis retailer in Yorkshire, sees consolidation as a logical market development, in which independent retailers benefit from the multiples’ buying power, while the multiples get to bypass investing in bricks and mortar. “It’s a no-brainer for Tesco - they’re just supplying boxes, there’s no overheads or costs associated with buying more stores,” he explains. “But by supplying independents it’s giving more power to us rather than spreading shoppers’ spend around more thinly. All the supermarket store openings haven’t done the industry any good. Aldi and Lidl are opening up here all the time, and online’s not helping either.”
Nimal Navaratnarajah, owner of five Costcutter stores in Devon and Cornwall, agrees that consolidation is mutually beneficial to retailer and supplier. “Supermarkets have changed from trying to expand their store presence to moving into supply now. Instead of opening new stores they’re letting others do the donkey work, which is a good thing. It gives us more power to trade while they work behind the scenes,” he says.
Jazz Heer, who owns a 1,000sq ft Costcutter store in Sutton-in-Craven, North Yorkshire, also welcomes Costcutter’s supply deal with the Co-op. “Consolidation is the way it’s going. There’ll be an Aldi Local in 10 years! Lots of Costcutter retailers have sold their stores - Leeds is saturated with the big boys.”
Nisa retailer Sid Ali, in Aberdeenshire, is looking forward to the Co-op takeover, although he still regards Sainsbury’s as a missed opportunity. “Nisa needed to tie-up with someone, but it should’ve been Sainsbury’s. It’s all about the volume of purchasing, and Sainsbury’s is bigger. However, the Co-op is probably up there with the best in the convenience sector.”
Sid believes he is in line for better range, pricing and own brand. “Hopefully there’ll be a better range of products, and we’ll have full access to the Co-op range. It’ll give us better own label - but I’m not sure whether I’d prefer having Nisa or Co-op branding. We’ve got a Costcutter and a Co-op in the village, so why would people go from one store to the other if you can get the same thing? Co-op labelling wouldn’t give us differentiation, but it will give us quality,” he says.
However, he adds: “Our margins should be better than they are now, though, which means we can undercut the Co-op and sell everything cheaper. Their managers wouldn’t have that flexibility.”
Nimal agrees that he could gain an upper hand on nearby Co-ops. “With the Co-op, if I can get a 25% margin, I’ll be able to undercut local Co-ops.”
As for the close proximity of Booker-supplied stores with Tesco sites, Mandeep Singh, a Premier retailer in Sheffield, is not concerned. “We’ve got a Tesco Metro half a mile up the road - but I think we’ll benefit from the deal more than the Tesco stores, as we’ll gain more. I don’t think we’ll get Tesco-branded lines, but if we can get access to some lines we don’t have now, it’ll benefit our business. Alcohol and fresh should be better,” he says. “I believe in [chief executive] Charles Wilson and what he says. Everything he’s done has been for the independent retailer. We were always going to benefit.”
Chris Shelley, who co-owns a Budgens store in Horsham, West Sussex, is hoping to have access to repackaged Tesco products. “I’m looking forward to a better product range and prices - fresh is where I’d like to see improvements, in particular. But if I was competing against a nearby Tesco I would think twice, as we could be selling similar products repackaged,” he says.
Jazz is hoping the Co-op wine range will provide a lifeline at his Yorkshire Costcutter store. “Wine is the big driver for me and I don’t think we’d be able to compete without the Co-op. I heard that prices would’ve gone up too much at Costcutter without the supply deal. And people don’t perceive Co-op wine to be expensive,” he explains. “I’m enthusiastic about the chilled range, too.”
However, one Nisa retailer, who prefers to remain anonymous, is more wary about the impact of the Co-op tie-up on his range. “Everything is unknown. I’m not that bothered by Co-op’s fresh range as we had quality fresh anyway. Maybe we’ll get 5-10% extra lines, but not all Nisa stores would be able to accommodate the fresh range, which is tailored to the design of Co-op stores,” he says. “They might use Nisa lorries to deliver to Co-op stores, too, so that’ll put pressure on Nisa stores.”
Barrie is expecting access to free banking from Tesco, which he believes could save him £500 a month in banking fees. Chris would also welcome free banking. “Anything to reduce costs is a good thing,” he says.
The option to become a Co-op franchisee has whetted many retailers’ appetites, although the joining criteria is unclear. Nimal says: “If we can get a franchise it would be great - three of our stores would be suitable and the right size, but that’s Co-op’s decision. If I don’t get a franchise I might try Southern Co-op instead. If I have the Co-op signage it will give me much more credibility to compete with other symbol groups.”
Jazz says he would be interested in becoming a Co-op franchisee, although his loyalty to Costcutter might influence his decision. “If it looks like I’ll increase sales as a Co-op franchisee, I’ll see if that’s possible. If it looks like the benefits aren’t great, I’ll stay as a Costcutter. But hats off to my BDM David Moore - lots of retailers have got fed up and left, but the support I’ve had from him has been phenomenal. He’s kept me on board.”
Sid also welcomes the option to become a Co-op franchisee. “We have the option to trade as we are or as a franchisee so we have the best of both worlds. But by stocking fewer big brands, there’s a risk of receiving less investment from those brands.”
Barrie believes a Tesco franchise option should be available to Booker-supplied retailers under the merger. “If Tesco let good independents run an Express franchise they’d do a better job than their managers, especially as we’d have more invested in the store,” he says. “But as long as I get better prices and range and free Tesco banking, I don’t care.”
As for the future, Sid believes consolidation has only just begun. “In the long run I think Asda or Sainsbury’s will snap up one of the big wholesalers such as Bestway. Sainsbury’s would then be able to sell, for example, imperfect carrots to Bestway, meaning they’d get a better price from farmers as they’d be able to increase their orders,” he predicts.
Barrie worries that the main losers will be independent wholesalers. “I feel for them; they’re going to suffer. If independent retailers can become Co-op franchisees, why would they go to cash and carries?” The negative implications of consolidation were highlighted by Steve Parfett, chairman of Parfetts, who wrote to MPs and ministers in November over what he perceived as the CMA’s “catastrophic error of judgement” in clearing the Booker-Tesco merger.
The unnamed Nisa retailer has concerns about the long-term impact of the Co-op deal . “I value my independence and at some point the Co-op might force us to take their branding and the Nisa brand may vanish. They may say we need to go elsewhere if we want to maintain our independence.”
But most retailers who spoke to C-Store are either upbeat about consolidation or resigned to its inevitability. “It’s very sad what happened to P&H and their staff, but you build up relationships with delivery staff right away. We’ve done that now with Bestway, who are supplying us before Co-op supply begins in the spring,” Nimal says. “Overall, I see no negatives.”
27 January 2017: Tesco and Booker announce plans for a £3.7bn merger
30 May 2017: The Competition and Markets Authority (CMA) opens a ‘phase 1’ investigation into the Tesco-Booker merger
29 June 2017: Booker asks CMA to “fast track” its investigation
12 July 2017: CMA refers the proposed merger for an in-depth ‘phase 2’ investigation
10 October 2017: Nisa Retail board recommends to its members a takeover offer from The Co-operative Group worth up to £137.5m
13 November 2017: Nisa members vote in favour of the Co-op Group takeover offer
14 November 2017: CMA provisionally clears the Tesco-Booker merger
28 November 2017: Wholesaler Palmer & Harvey enters administration
29 November 2017: Costcutter Supermarkets Group (CSG) agrees supply deal with Co-op Group
20 December 2017: CMA formally approves Tesco-Booker merger
March 2018: Completion of Tesco-Booker merger expected
March 2018: CMA clearance of the Co-op’s takeover of Nisa expected
Spring 2018: Co-op Group to begin supplying CSG stores
Price war on the horizon?
Consolidation will spark a price war in convenience in 2018, an influential analyst firm predicts. “Tesco-Booker, in particular, will be able to bring prices down within convenience with its scale efficiencies and improved buying power,” says GlobalData’s senior retail analyst Molly Johnson-Jones. “Just as we saw from 2012-2016 with the discounter-led price war, as soon as one party moves to bring prices down, everyone moves. This will lead to margin erosion for convenience operators, and many independents will be pushed out of the market.”
Retailers will also be looking to sweat assets instead of expanding space. “Space expansion has been slowing since 2012, with most space addition coming from the discounters. Input inflation will continue to pressurise retailers through 2018, and, as a result, the grocers will be searching for ways to diversify their stores to increase sales densities as much as possible,” she adds.