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Industry reaction: Tesco to buy Booker

Industry reaction: Tesco to buy Booker

The UK's biggest supermarket group Tesco has agreed to buy UK’s biggest food wholesaler Booker Group in a £3.7bn deal. Around 35% of the £175m in 'cost synergies' - equating to a touch over £61m - are expected to come from "opportunities in logistics and delivery".

Booker is the UK's largest cash and carry operator, supplying branded and private-label goods to independent convenience stores, grocers and leisure outlets. It supplies thousands of product lines - from frozen food to tobacco - and claims more than 1.3 million customers.

The company also supplies catering services for pubs, restaurants and other clients. Its retail operations include 3,200 Premier branded stores, 47 discount stores operating under the Family Shopper brand, 1,500 Londis stores, and 120 Budgens shops.It also owns also Makro, the cash-and-carry brand, with 30 outlets across the UK.

Profits for the group were £127.8m in the year ending 27th March 2016.

Tesco chief executive Dave Lewis described the deal as a merger, rather than a takeover, "because what we're doing is bringing together two very complementary businesses which have a focus on food and a focus on customers, and it's all about thinking about how it is we can serve the UK food market together better".

In its statement announcing the deal, Tesco said: "The merger is also expected to enable opportunity for cost synergies of at least £175m, mainly in areas such as procurement and distribution."

It added: "The Tesco board recognises the attractive opportunity which exists for the merger to bring together retail and wholesale expertise to create a market leader in products and procurement, with extensive reach, distribution and supply chain capabilities to create the UK’s leading food business."

Further in the statement, it identified a figure of £175m is cost synergies brought about by the merger. It breaks this figure down as follows:

  • Procurement: approximately 55% of the identified cost synergies are expected to be generated from improved purchasing cost efficiencies and sharing best practice across each of the three main types of supplier: fresh, own label and branded. These opportunities comprise end-to-end cost reduction, lower waste, new opportunities for shared innovation and better optimisation of supply terms for the combined group.
  • Distribution and fulfilment: approximately 35% of the identified cost synergies are expected to be generated from opportunities in logistics and delivery, and improved efficiency and service standards. Optimising a joint national distribution system of Tesco and Booker is expected to lead to material benefits, including sharing parts of the fleet and expanding click and collect services. Tesco also anticipates savings in relation to final mile delivery to customers.
  • Central functions and other: less than 10% of the identified cost synergies are expected to be generated from the reduction of duplicate costs and improved purchase of goods not for resale.

Lewis added that the deal is not about cutting costs in Tesco's supply chain, but about "looking at the food market completely differently".

Lord Haskins, former Chair of Northern Foods and now a crossbench peer, told the BBC that it is an ironic turn of events as "the big out-of-town stores destroyed these small convenience in town stores 30 years ago" and now Tesco is buying into them.

The deal is still subject to ratification by the Competition Regulator.

NFU

Meurig Raymond, president of The National Farmers' Union, issued the following statement:

"The NFU will be examining the details of this proposed merger between Tesco and Booker and the further concentration of retail power it creates within the food supply chain to see what kind of effect it will have on farmer suppliers.

"Tesco has launched a number of positive initiatives to work with farmers such as the Tesco Sustainable Dairy Group and similar arrangements which support farmers. We would want to see these same initiatives carried through to the new business structure."

LCP Consulting

Professor Alan Braithwaite, Chairman of supply chain and logistics consultancy LCP Consulting - which works with many of the top 10 retailers in the UK - pointed out that this deal has industrial logic. He said:
 
“The big win is that it takes Tesco into the food service arena which is the food growth market – people are eating out and institutional catering is still growing. It will give the business the platform to further challenge in that market. It will allow the Booker side of the enterprise to leverage procurement and inventory so there is a margin opportunity too. This is especially important in the light of food inflation that is now accelerating with the weaker pound.
 
“Looking longer term, if the deal goes through, there are major operational opportunities to integrate fulfilment networks using Tesco’s capabilities for e-commerce but adding services and accelerating response times, enabling click and collect and integrating food service deliveries. So, the competitive advantage could be compelling.
 
“Booker own or control Londis, Premier and Budgens retail chains/facias – so there may well be a Competition Commission complaint based on Tesco’s high convenience store and market share already. This is contrary to the published statement by Tesco. However, the Competition Commission has historically struggled with the market place segmentation in food and grocery – so it is difficult to anticipate any ruling.”

Colliers

Len Rosso, Head of Industrial and Logistics at Colliers International, says: "We can understand Tesco's perspective on going back to its traditional food retail roots. In addition, Booker and Tesco evidently have aligned synergies and the wholesaler has been able to turn around its past debt issue so from the supermarket's standpoint, this is an attractive business move and makes core sense.

"What will be interesting to see is the outcome, particularly in terms of Booker's 172 wholesale sites, which are due to be brought into the Tesco remit. They are all in good locations but whether Tesco will move them away from here and turn the sites from wholesale into supermarkets will be the question on everyone's lips."

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