Retailers Carrefour and Tesco join forces in strategic alliance to boost purchasing firepower

The Carrefour-Tesco deal is the latest partnership within the European retail industry, which has seen US Internet giant Amazon make in-roads into the sector in recent months. (Reuters)
Updated 02 July 2018
0

Retailers Carrefour and Tesco join forces in strategic alliance to boost purchasing firepower

  • Carrefour and Tesco agree to form a global alliance aimed at cutting costs
  • The move comes as Amazon makes inroads into European market and suppliers are concerned that they risk being squeezed hard

PARIS/LONDON: Europe’s largest supermarket groups Carrefour and Tesco have agreed to form a global purchasing alliance to demand better terms from major suppliers in the latest attempt by the industry to cut costs.
With combined annual sales of $170 billion, the partnership is designed to secure lower prices from the likes of Nestle, Procter & Gamble, Unilever, Danone and others to help the French and British groups stay competitive at home and abroad.
The announcement marks the latest reinvention in an industry that is grappling with the rapid move online, competition from discount groups such as Aldi and Lidl and the looming shadow of US Internet giant Amazon.
Analysts said the combined firepower should help Carrefour, which has lower margins than Tesco, but warned it could lead to a spiralling price war. Suppliers said it posed a threat to their survival.
“This ... combines the purchasing expertise of two world leaders, complementary in their geographies, with common strategies,” said Carrefour CEO Alexandre Bompard.
The alliance will cover strategic relations with global suppliers in areas such as marketing services or data collection as well as the joint purchasing of own-brand products and goods used in their own businesses, Carrefour said.
The alliance, which will be formally agreed in the next two months, is unlikely to include fresh food products as each company will continue to work with supplier partners at a local and national level.
Financial terms were not disclosed. The companies said it would be governed by a “three-year operational framework.”
“By working together and making the most of our collective product expertise and sourcing capability, we will be able to serve our customers even better, further improving choice, quality and value,” said Tesco CEO Lewis.
Lewis joined Tesco from Unilever where he ran its personal care division.
Analysts at Jefferies estimated the deal could lead to initial total savings of 400 million pounds or 450 million euros.
“More generally we wonder whether the advance of players like Amazon and the German discounters (businesses underpinned by truly global supply chains) will continue to force a drastic change in sourcing processes,” they said.
European groups Auchan Retail, Casino, Metro and Schiever agreed their own purchasing partnership last week.
Tesco faces a threat to its market leadership in Britain after second-ranked Sainsbury’s agreed to buy Wal-Mart owned Asda, the number three player. It said in June it would cut food prices to stay ahead of rivals.
Some analysts speculated that the Carrefour-Tesco alliance could even be the precursor to a merger between the two.
TOUGH TIMES
Carrefour and Tesco have limited overlap and the partnership excludes the two countries where they do — Poland and China.
Carrefour, Europe’s largest retailer, makes the bulk of its 88 billion euros ($102.5 billion) worth of sales in Europe and Brazil while Tesco operates in Britain, Ireland, eastern Europe, Malaysia and Thailand, and has a wholesale presence in India.
The two groups also face challenges on the horizon.
Carrefour has issued cautious targets for this year after weakness in its home market weighed on sales growth in the first three months of the year.
In January it announced plans to cut costs and jobs, boost e-commerce investment and seek a partnership in China, in an effort to lift profit and revenue and beat domestic rivals in the race to develop digital shopping products.
It has already agreed a five-year purchasing alliance with French supermarket firm Systeme-U to make Carrefour the biggest buyer in its home market where competition has been fierce.
Smaller rival Casino’s Monoprix chain in March became the first local retailer to sell groceries via Amazon in the Paris area. This followed a deal last year between Casino and grocery e-commerce tech provider Ocado Group Plc.
Tesco, with sales of 51 billion pounds ($67.2 billion), has rebuilt itself under Lewis after the discovery of an accounting scandal in 2014 compounded a sharp downturn in trading, which strained relations with its suppliers at the time.
The group has cut costs, invested in stores and bought wholesaler Booker to be able to expand into supplying restaurants, cafes and local stores.
Shares in both Carrefour and Tesco made only modest gains, with European stock markets under pressure.
Mella Frewen, director general of industry body FoodDrinkEurope, warned that the creation of such huge buying alliances threatened her members
“On top of the recent Sainsbury — ASDA alliance, this will have a huge impact on the balance of power along the food chain, to the detriment of all suppliers, regardless of size.”
Jonathan Buxton, head of Consumer and Retail at M&A advisory group Cavendish Corporate Finance, said the partnership was designed to contain discounters, defend margins and counter any future move by Amazon.
“While the partnership stands to partially solve the significant strategic and market issues both retailers face, there is clear logic for the deal to become permanent and could result in a formal merger between the two firms.” ($1 = 0.7595 pounds) ($1 = 0.8587 euros)


South Korea downgrades Japan trade status as dispute deepens

Updated 18 September 2019

South Korea downgrades Japan trade status as dispute deepens

  • The change comes a week after South Korea initiated a complaint to the World Trade Organization
  • The new measures in effect mean it might take up to 15 days for South Korean companies to gain approvals to export sensitive materials to Japan

SEOUL, South Korea: South Korea on Wednesday dropped Japan from a list of countries receiving fast-track approvals in trade, a reaction to Tokyo’s decision to downgrade Seoul’s trade status amid a tense diplomatic dispute.
South Korea’ trade ministry said Japan’s removal from a 29-member “white list” of nations enjoying minimum trade restrictions went into effect as Seoul rearranged its export control system covering hundreds of sensitive materials that can be used for both civilian and military purposes.
The change comes a week after South Korea initiated a complaint to the World Trade Organization over a separate Japanese move to tighten export controls on key chemicals South Korean companies use to manufacture semiconductors and displays.
Seoul has accused Tokyo of weaponizing trade to retaliate against South Korean court rulings ordering Japanese companies to offer reparations to South Koreans forced into labor during World War II. Tokyo’s measures struck a nerve in South Korea, where many still resent Japan’s brutal colonial rule from 1910 to 1945.
According to South Korean trade ministry, the new measures in effect mean it might take up to 15 days for South Korean companies to gain approvals to export sensitive materials to Japan, compared to the five days or less it took under a simpler inspection process provided for favored trade partners.
Lee Ho-hyeon, a South Korean trade ministry official, said the change would affect about 100 local firms that export items such as telecommunications security equipment, semiconductor materials and chemical products to Japan. He said Seoul will work to minimize disruption to South Korean companies.
Japan for decades has enjoyed a huge trade surplus with South Korea, an economy that’s much more dependent on exports. Many major manufacturers heavily rely on parts and materials imported from Japan.
But the dispute is taking a toll. Exports to South Korea from Japan fell 9.4% last month, Japan’s Finance Ministry reported Wednesday.
The trade dispute between the neighbors erupted in July, when Japan imposed tighter export controls on three chemicals South Korean companies use to produce semiconductors and displays for smartphones and TVs, major export items for South Korea. It cited unspecified security concerns over Seoul’s export controls.
A few weeks later, Japan dropped South Korea from its own trade “white list,” triggered a full-blown diplomatic dispute that took relations between the US allies to their worst in decades.
The dispute has spilled over to security issues, with Seoul declaring it plans to terminate a bilateral military intelligence-sharing pact with Japan that symbolized the countries’ three-way security cooperation with the United States in the face of North Korea’s nuclear threat and China’s growing influence.
Following an angry reaction from Washington, Seoul later said it could reconsider its decision to end the military agreement, which remains in effect until November, if Japan relists South Korea as a favored trade partner.
Seoul announced its plans to downgrade Tokyo’s trade status in August before holding a 20-day period to gather opinions on the decision, during which the Japanese government voiced opposition to the move it described as “arbitrary and retaliatory,” Lee said.
He said Seoul needs to strengthen controls on shipments to a country that’s “hard to cooperate with” and fails to uphold “basic international principles” while managing export controls on sensitive materials.
South Korea previously divided its trade partners into two groups in managing export controls on sensitive materials. Following Wednesday’s change, South Korea now has an in-between bracket where it placed only Japan, which would mostly receive the same treatment in trade as the non-favored nations in what had been the second group.