Supermarket giants create alliance
On Monday, July 3rd, Tesco and Carrefour announced a purchasing alliance to secure better deals from their suppliers in order to lower the costs of own-brand products. Tesco (£57.5bn turnover) is the largest supermarket chain in the UK and Carrefour (£78bn turnover) holds the same position for Europe and indeed is the second largest bricks-and-mortar retailer in the world after Wal-Mart. The two giants have a similar brand positioning, appealing to a broad audience with the promise of variety, quality and value for money.
Supermarkets have considerable control over own-brand products in terms of market research, product development, branding, marketing — and profit margins. Currently 50% of Tesco sales come from their private labels, and a quarter of Carrefour’s do, with an aim to increase that to one third.
The BBC asked me to comment on this deal, with an appearance on the Business News and on World News GMT with Aaron Heslehurst, as well as an interview with Lucy Burton on the World Service (listen from 4 minutes, 40 seconds at the link).
There is huge pressure on UK retail, causing up to 22,000 job losses over the course of this year. Toys R Us, Maplin, Prezzo, M&S and House of Fraser have announced store closures due to cost-cutting or insolvency. People have less to spend, and they talk with their wallets.
Sainsbury’s, the UK’s second-largest supermarket, is in advanced talks to buy the third largest, Asda. And Amazon has a deal with the smallest of the UK’s big four chains, Morrisons, to provide groceries to the UK market, and an acquisition by the online behemoth is not out of the question, which would create another threat to Tesco. Not to mention the German hard discounters Aldi and Lidl nipping at the big four’s heels.
This deal between Tesco and Carrefour reinforces their positioning as traditional brands, unlike the paradigm-changing partnership between Amazon and Morrisons. Don’t look for any cutting-edge artificial intelligence or augmented reality here. Because the alliance involves the supermarkets’ suppliers, it could include sharing marketing resources and customer data. In these days of GDPR and #deleteFacebook, Tesco and Carrefour will need to be transparent about the agreement in order to maintain a positive reputation with their audience. We buy from brands we trust, particularly when we are ingesting their products.
There has been no mention of rebranding or renaming, and I don’t expect to see a Tesfour hypermarket near me anytime soon.
Is Brexit ever far from our thoughts? This move is a way for Tesco to hedge its bets against a hard Brexit. If there are tariffs on EU products in eight months’ time, Tesco will already benefit from better prices from suppliers. And if there isn’t a hard Brexit, Tesco will have a competitive advantage. Read what Leidar UK’s Communication Director, Charlie Pryor, says about Brexit: ‘Don’t keep quiet‘!
This alliance could end up squeezing suppliers. Just like in fashion, where we hardly ever pay the true cost for our clothes, it’s vital that any pricing deals which the two giants are able to secure are sustainable for all parties in the long run. As large corporations, Tesco and Carrefour have an ethical responsibility to act not only in their own best interest, but also to benefit customers and suppliers. If they can accomplish this, and communicate clearly about it, there will be a positive impact on their brands.