Tesco’s ruthless pursuit of higher group operating margin continues, with the announcement of a long-term strategic alliance with French multinational grocery titan Carrefour.
The partnership will see the pair using their global buying power to ramp up the pressure on suppliers, looking to cut costs through the joint purchasing of own-brand products.
And with a whopping joint revenue (2017) of £111.6bn, suppliers across Europe will rightfully be concerned that this partnership will further see retailers increase margins at the expense of their own – and will particularly damage the smaller providers, who have operated around the border of profitability for years, even without this additional pressure.
Reasons for the deal
Tesco’s decision to enter into the partnership stems from its long-term aim to achieve a group operating profit of 3.5%-4% by February 2020 – a testing challenge given its current 2.9% margin as of February 2018.
And while its latest full-year results show sales growth of 2.3%, this sits behind competitors Sainsbury’s (+8.5%) and Morrisons (+5.8%) over a similar period, and behind food and grocery inflation (3.2% for 2017).
Tesco looking for ways to increase profit
With Tesco swiftly realising that increasing sales will not be enough to reach its goal, it began to cut any deadwood from the organisation – ending its `Brand Guarantee’ scheme a week ago, and closing its unprofitable Tesco Direct website in May.
From Carrefour’s perspective, it represents future-proofing its French domestic operations against a torrent of recent partnerships.
Competitor Auchan Retail and distribution specialists Schiever Group recently announced partnerships with German cash & carry giant Metro, while Groupe Casino made headlines in November last year as it partnered with Ocado to make use of its innovative grocery ecommerce platform.
What does it mean for the average shopper?
Unless you happen to work for/with food suppliers, it’s probably good news for your bank balance.
While Tesco will surely keep some of the savings to hit that all-important operating KPI it will certainly pass on some savings to the shelf-edge; if only to keep up with Sainsbury’s commitment to lower own-brand prices by 10%.
Unfortunately, it may also see branded items slowly disappear from shelves as Tesco, Sainsbury’s and ASDA all look to increase the mix of own-brand products, subsequently narrowing the choice across ranges. But there is a small silverlining – Camembert and French wine lovers can at least look forward to Carrefour products hitting UK shelves.
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