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| War of convenience as supermarket chains take on small stores | War of convenience as supermarket chains take on small stores |
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| ‘I used to know 98% of my customers by name but now it’s more like 40 to 50%, as there’s always new people coming in and shoppers are not so loyal these days,” says Vijay Patel, who has been manning the checkout in his shop on the edge of a London council estate since the early 80s. | ‘I used to know 98% of my customers by name but now it’s more like 40 to 50%, as there’s always new people coming in and shoppers are not so loyal these days,” says Vijay Patel, who has been manning the checkout in his shop on the edge of a London council estate since the early 80s. |
| Patel, 64, can usually be found watching the BBC news from his perch behind the counter. He is a modern-day Arkwright from Open All Hours, spending 70 hours a week making sure the shelves are full and there’s no queue at the till. But over the past 15 years small shopkeepers like Patel, whose family moved to London from Kenya in the 60s, have found themselves in the front line of an escalating convenience-store war, as the big supermarkets moved into what had once been considered a retail backwater. | Patel, 64, can usually be found watching the BBC news from his perch behind the counter. He is a modern-day Arkwright from Open All Hours, spending 70 hours a week making sure the shelves are full and there’s no queue at the till. But over the past 15 years small shopkeepers like Patel, whose family moved to London from Kenya in the 60s, have found themselves in the front line of an escalating convenience-store war, as the big supermarkets moved into what had once been considered a retail backwater. |
| Now the convenience store market is facing renewed scrutiny after Tesco pulled a rabbit out of the hat last month by announcing a £3.7bn takeover of cash-and-carry giant Booker. The surprise move has set hares running among rival retailers and wholesalers in a market where around 80% of the UK’s 41,000-plus convenience stores are still independents or belong to buying groups such as Costcutter or Nisa (known as the “symbol groups” in the industry). | Now the convenience store market is facing renewed scrutiny after Tesco pulled a rabbit out of the hat last month by announcing a £3.7bn takeover of cash-and-carry giant Booker. The surprise move has set hares running among rival retailers and wholesalers in a market where around 80% of the UK’s 41,000-plus convenience stores are still independents or belong to buying groups such as Costcutter or Nisa (known as the “symbol groups” in the industry). |
| Convenience stores are an increasingly important player in the UK food market, ringing up £37.5bn of last year’s £179bn total grocery sales, according to research by analysts at IGD, the industry trade body. IGD thinks the convenience pie will increase by 11.7% over the next five years to £42bn as Britons turn their backs on the weekly shopping trip in favour of more frequent top-up shops. | Convenience stores are an increasingly important player in the UK food market, ringing up £37.5bn of last year’s £179bn total grocery sales, according to research by analysts at IGD, the industry trade body. IGD thinks the convenience pie will increase by 11.7% over the next five years to £42bn as Britons turn their backs on the weekly shopping trip in favour of more frequent top-up shops. |
| “When we opened the store here in the 80s, the only competition was a small independent round the corner but now there are 11 major shops on my doorstep,” says Patel, reeling off a list of competitors to his Nisa Local store that includes Sainsbury’s, Marks & Spencer and Waitrose. “That’s the competition. I have to fight with all 11 of them. How long can you do that?” | “When we opened the store here in the 80s, the only competition was a small independent round the corner but now there are 11 major shops on my doorstep,” says Patel, reeling off a list of competitors to his Nisa Local store that includes Sainsbury’s, Marks & Spencer and Waitrose. “That’s the competition. I have to fight with all 11 of them. How long can you do that?” |
| One of the reasons the proposed Tesco deal is causing so much consternation in the sector is that Booker has 125,000 retailers on its books, including the 5,400-odd stores that are part of Booker’s own symbol networks, taking in the Premier, Londis, Budgens and Family Shopper brands. Tesco, meanwhile, operates close to 2,500 convenience stores under its Express and One Stop banners, although some analysts also count its 300 Metro high street supermarkets in this group. | One of the reasons the proposed Tesco deal is causing so much consternation in the sector is that Booker has 125,000 retailers on its books, including the 5,400-odd stores that are part of Booker’s own symbol networks, taking in the Premier, Londis, Budgens and Family Shopper brands. Tesco, meanwhile, operates close to 2,500 convenience stores under its Express and One Stop banners, although some analysts also count its 300 Metro high street supermarkets in this group. |
| Tesco already speaks for close to 30% of the UK grocery market, and the controversial deal promises to hand it control of another 2%. | Tesco already speaks for close to 30% of the UK grocery market, and the controversial deal promises to hand it control of another 2%. |
| Just under half of Booker’s £3.2bn cash-and-carry sales are trade with shopkeepers in its symbol-group networks. Announcing the deal last month, Tesco’s chief executive, Dave Lewis, and Charles Wilson, his counterpart at Booker, argued the greater buying power of the enlarged business would be a force for good that would “delight consumers with better availability of quality food at fair prices”. | Just under half of Booker’s £3.2bn cash-and-carry sales are trade with shopkeepers in its symbol-group networks. Announcing the deal last month, Tesco’s chief executive, Dave Lewis, and Charles Wilson, his counterpart at Booker, argued the greater buying power of the enlarged business would be a force for good that would “delight consumers with better availability of quality food at fair prices”. |
| But a decade of aggressive convenience-store opening programmes by the likes of Tesco and Sainsbury’s, coupled with the rise of discounters Aldi and Lidl, means it has been getting harder for small shopkeepers like Patel to survive. | But a decade of aggressive convenience-store opening programmes by the likes of Tesco and Sainsbury’s, coupled with the rise of discounters Aldi and Lidl, means it has been getting harder for small shopkeepers like Patel to survive. |
| “It was a good living – but now there is more competition, our profit margins have come down,” says Patel. Today there are 19,000 independents who source their own stock – often from cash-and-carry outlets owned by Booker – while another 15,000 are members of a symbol group, like Patel, or a franchise network. | |
| “There used to be a time when the convenience trade was left to independent, family-run stores who would stay open all hours, and customers would accept that they were being charged a few pennies more for the convenience,” says one corporate financier. “But Tesco and Sainsbury’s have opened a helluva lot of convenience stores, so shoppers expect the same prices from their corner shop as they pay in big supermarkets. Aldis and Lidls are within walking distance of most people’s homes, so are a kind of convenience store too. That has also pulled down pricing in the sector. | “There used to be a time when the convenience trade was left to independent, family-run stores who would stay open all hours, and customers would accept that they were being charged a few pennies more for the convenience,” says one corporate financier. “But Tesco and Sainsbury’s have opened a helluva lot of convenience stores, so shoppers expect the same prices from their corner shop as they pay in big supermarkets. Aldis and Lidls are within walking distance of most people’s homes, so are a kind of convenience store too. That has also pulled down pricing in the sector. |
| “Independent groups need to think about consolidation,” he continues. “That’s the only thing that’s going to allow them to increase their buying power and bring their prices down so they can compete.” | “Independent groups need to think about consolidation,” he continues. “That’s the only thing that’s going to allow them to increase their buying power and bring their prices down so they can compete.” |
| In 2012, Costcutter’s attempt to buy Scunthorpe-based Nisa, which has more than 1,000 stores in its network, was rejected. More recently Nisa has been linked to merger talks with cash-and-carry group Bestway. In 2015, Booker bought the Budgens and Londis chains from Musgrave for £40m, bringing nearly 1,800 stores under its wing. | In 2012, Costcutter’s attempt to buy Scunthorpe-based Nisa, which has more than 1,000 stores in its network, was rejected. More recently Nisa has been linked to merger talks with cash-and-carry group Bestway. In 2015, Booker bought the Budgens and Londis chains from Musgrave for £40m, bringing nearly 1,800 stores under its wing. |
| Because of its size, the Tesco tie-up with Booker will automatically face the scrutiny of the Competition and Markets Authority (CMA), with the regulator expected to open its preliminary fact-finding investigation any day now. Most retail experts believe the CMA will ultimately launch a full-blown inquiry that could delay the marriage for the best part of year. Critics of the deal worry about the potential for Tesco to become the dominant force in convenience retailing in some postcodes, while others point to the “significant” market share the enlarged business will have in some branded grocery categories. | Because of its size, the Tesco tie-up with Booker will automatically face the scrutiny of the Competition and Markets Authority (CMA), with the regulator expected to open its preliminary fact-finding investigation any day now. Most retail experts believe the CMA will ultimately launch a full-blown inquiry that could delay the marriage for the best part of year. Critics of the deal worry about the potential for Tesco to become the dominant force in convenience retailing in some postcodes, while others point to the “significant” market share the enlarged business will have in some branded grocery categories. |
| “I’ve taken a lot of calls from independent retailers and retailers in our network who are concerned by this,” says Darcy Willson-Rymer, who runs symbol group Costcutter, which has more than 2,600 members. “We support consolidation, but the right sort of consolidation that benefits customers, retailers and suppliers,” he adds. “I think the CMA is best placed to answer whether that’s the case here – but I would say that, given my position, wouldn’t I?” | “I’ve taken a lot of calls from independent retailers and retailers in our network who are concerned by this,” says Darcy Willson-Rymer, who runs symbol group Costcutter, which has more than 2,600 members. “We support consolidation, but the right sort of consolidation that benefits customers, retailers and suppliers,” he adds. “I think the CMA is best placed to answer whether that’s the case here – but I would say that, given my position, wouldn’t I?” |
| Tesco made its first serious foray into what was then the backwater of convenience store retailing when it swooped on West Midlands-based T&S, buying the FTSE 250 company for £377.3m, in 2002. Tesco’s boss at the time, Sir Terry Leahy, tabled his offer at the end of October and his comments echo those of Lewis today when he promised it was “great news for customers”. Things moved quickly and Leahy was able to toast the deal’s success over that year’s Christmas dinner after Patricia Hewitt, then secretary of state for trade and industry at the time, waved it through. | Tesco made its first serious foray into what was then the backwater of convenience store retailing when it swooped on West Midlands-based T&S, buying the FTSE 250 company for £377.3m, in 2002. Tesco’s boss at the time, Sir Terry Leahy, tabled his offer at the end of October and his comments echo those of Lewis today when he promised it was “great news for customers”. Things moved quickly and Leahy was able to toast the deal’s success over that year’s Christmas dinner after Patricia Hewitt, then secretary of state for trade and industry at the time, waved it through. |
| A lot has changed in grocery retailing over the past 15 years, not least the arrival of Aldi and Lidl as a major force, but any deal that adds to the might of already-mighty Tesco is expected to be picked over with a fine-tooth comb. | A lot has changed in grocery retailing over the past 15 years, not least the arrival of Aldi and Lidl as a major force, but any deal that adds to the might of already-mighty Tesco is expected to be picked over with a fine-tooth comb. |
| One senior industry source said he was certain the deal would face an in-depth inquiry, as the “noise would be deafening” from Tesco’s rivals unnerved by the tectonic shift in Tesco’s favour. There is also the huge cost of engaging teams of lawyers and economists to do battle with the CMA’s complex market models. | One senior industry source said he was certain the deal would face an in-depth inquiry, as the “noise would be deafening” from Tesco’s rivals unnerved by the tectonic shift in Tesco’s favour. There is also the huge cost of engaging teams of lawyers and economists to do battle with the CMA’s complex market models. |
| “The CMA will be incredibly detailed,” he says. “An investigation is very costly and a major distraction for senior management. There’s unintended consequences [with] these things because you are unable to make decisions – because you’re not sure of what is going to happen.” | “The CMA will be incredibly detailed,” he says. “An investigation is very costly and a major distraction for senior management. There’s unintended consequences [with] these things because you are unable to make decisions – because you’re not sure of what is going to happen.” |
| The industry veteran harbours his own doubts about the deal, which he fears could lessen competition at store level while at the same time putting pressure on suppliers. | The industry veteran harbours his own doubts about the deal, which he fears could lessen competition at store level while at the same time putting pressure on suppliers. |
| “Charles Wilson is clever and Dave Lewis is no slouch either, and I can see why they think it would work, but from a market perspective, if you ask ‘Is it in the interest of consumers?’ – probably not. | “Charles Wilson is clever and Dave Lewis is no slouch either, and I can see why they think it would work, but from a market perspective, if you ask ‘Is it in the interest of consumers?’ – probably not. |
| “I don’t think it is helpful to competition if you give too much volume and authority to a dominant grocery retailer, as they are. This is not a done deal.” | “I don’t think it is helpful to competition if you give too much volume and authority to a dominant grocery retailer, as they are. This is not a done deal.” |
| WHAT WILL THE TESCO-BOOKER MERGER MEAN? | WHAT WILL THE TESCO-BOOKER MERGER MEAN? |
| Tesco’s merger with Booker is raising both concerns and hopes among suppliers, depending on their size and what they produce. Farmers and small-scale food processors or manufacturers are nervous as they could be squeezed by the already massive Tesco gaining more power. | Tesco’s merger with Booker is raising both concerns and hopes among suppliers, depending on their size and what they produce. Farmers and small-scale food processors or manufacturers are nervous as they could be squeezed by the already massive Tesco gaining more power. |
| Analysts estimate Booker will add about £2bn-£3bn to Tesco’s current £45bn of buying power. Meanwhile, Tesco says it will save £175m a year in costs – £96m from improved procurement. | Analysts estimate Booker will add about £2bn-£3bn to Tesco’s current £45bn of buying power. Meanwhile, Tesco says it will save £175m a year in costs – £96m from improved procurement. |
| “Consolidation at the downstream [retail] end of the food supply chain spells only one thing, and that’s continued supply-chain consolidation upstream as well,” says Duncan Swift, head of the food advisory group at accountants Moore Stephens. And he says the savings Tesco has talked about can mean only one thing for its suppliers – reduced profit margins. | |
| Ged Futter of GSCOP, which advises suppliers on their dealings with supermarkets, says: “It is always concerning when a dominant player gets more power.” He says many food suppliers currently benefit from a higher margins on the goods they supply to food-service customers (catering outlets) or wholesalers (like cash-and-carry outlets), which they can balance out against tight profits on supplying supermarkets. If Tesco seeks to level the margins across all areas of the merged business it could be very bad news for suppliers. | Ged Futter of GSCOP, which advises suppliers on their dealings with supermarkets, says: “It is always concerning when a dominant player gets more power.” He says many food suppliers currently benefit from a higher margins on the goods they supply to food-service customers (catering outlets) or wholesalers (like cash-and-carry outlets), which they can balance out against tight profits on supplying supermarkets. If Tesco seeks to level the margins across all areas of the merged business it could be very bad news for suppliers. |
| One senior insider agrees: “I imagine the independent out-of-home and convenience retail sector is where Tesco thinks it can deliver the biggest gains from enhanced buying power.” | One senior insider agrees: “I imagine the independent out-of-home and convenience retail sector is where Tesco thinks it can deliver the biggest gains from enhanced buying power.” |
| Big international brand owners, such as Unilever, P&G and Birds Eye, are thought to be likely losers from the tie-up as this is where the combined Tesco-Booker will gain more market share. | Big international brand owners, such as Unilever, P&G and Birds Eye, are thought to be likely losers from the tie-up as this is where the combined Tesco-Booker will gain more market share. |
| Tesco has already had a very public spat with Unilever after the Marmite-to-Hellmann’s group tried to raise priceswith all retailers in response to the post-referendum fall in the value of the pound. The supermarket won a better deal than many of its rivals; now it will have even more weight. | Tesco has already had a very public spat with Unilever after the Marmite-to-Hellmann’s group tried to raise priceswith all retailers in response to the post-referendum fall in the value of the pound. The supermarket won a better deal than many of its rivals; now it will have even more weight. |
| But analysts reckon suppliers of own-label products to the supermarkets will be quite comfortable with the deal. | But analysts reckon suppliers of own-label products to the supermarkets will be quite comfortable with the deal. |
| Damian McNeela at HSBC says: “It may mean incremental volumes for them as most aren’t supplying Booker at the moment.” He adds that limited spare capacity among own-label suppliers in some areas, such as ready meals, make it difficult for Tesco to make a big switch to pastures new. | Damian McNeela at HSBC says: “It may mean incremental volumes for them as most aren’t supplying Booker at the moment.” He adds that limited spare capacity among own-label suppliers in some areas, such as ready meals, make it difficult for Tesco to make a big switch to pastures new. |
| Another positive is that a Tesco-Booker deal is likely to increase the prospect of the Groceries Supply Code of Practice being extended; it is currently limited to retailers with turnover above £1bn. The National Farmers Union and others have called for wholesalers and food processors to come under the auspices of the Groceries Code Adjudicator, Christine Tacon, who has helped improve suppliers’ treatment. | Another positive is that a Tesco-Booker deal is likely to increase the prospect of the Groceries Supply Code of Practice being extended; it is currently limited to retailers with turnover above £1bn. The National Farmers Union and others have called for wholesalers and food processors to come under the auspices of the Groceries Code Adjudicator, Christine Tacon, who has helped improve suppliers’ treatment. |
| Ruth Mason, the NFU’s chief food chain adviser, says: “Tesco’s relationship with suppliers and Booker’s should be subject to the same legal requirements.” | Ruth Mason, the NFU’s chief food chain adviser, says: “Tesco’s relationship with suppliers and Booker’s should be subject to the same legal requirements.” |
| Futter says such a move could bring thousands more food producers under the protective eye of the GCA, giving them better awareness of their rights and back-up in enforcing them. | Futter says such a move could bring thousands more food producers under the protective eye of the GCA, giving them better awareness of their rights and back-up in enforcing them. |
| Mason adds that Tesco buys a greater proportion of its produce in the UK and extending that into Booker could be good news for farmers. But she says it is too early to tell: “It depends if it uses that [new] power for good – or to make massive commercial gains by putting pressure on the supply chain.”Sarah Butler | Mason adds that Tesco buys a greater proportion of its produce in the UK and extending that into Booker could be good news for farmers. But she says it is too early to tell: “It depends if it uses that [new] power for good – or to make massive commercial gains by putting pressure on the supply chain.”Sarah Butler |
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