Tesco and Carrefour alliance makes sense for Europe’s two largest retailers

Today’s announcement that Tesco and Carrefour are to enter a strategic alliance makes good sense for the two largest grocery players in Europe.

Consolidation in the UK market has been well documented, most recently with news that Sainsbury’s and Asda plan to merge. Newer players including Amazon threaten to upset the grocery market’s status quo and discounters continue to gain share across Europe. Brexit also presents challenges for retailers on both sides of the English Channel. The reality is that trading conditions have become far more difficult for Tesco and Carrefour over recent years, and they likely to become more difficult still.

While details of the arrangement are lacking at this time, the main focus on the alliance centres on buying at an international level, though they have been clear the national and local buying will continue. This will provide crucial buying advantages to help take on discounters. Private label is also a priority – a clever move that, as well as providing buying cost advantages, will help secure more exclusive product and scale up innovation in NPD. For retailers like Tesco and Carrefour this can provide a critical source of differentiation and competitive advantage.

Though the benefits for Tesco and Carrefour are obvious to see, suppliers across Europe – including the largest players – will be watching with interest and some concern. Granted the deal will help strengthen certain supplier relationships, but greater buying scale is bound to put pressure on suppliers’ gross margins across the board. The move is also likely to lead to rationalisation of the supplier base and we would anticipate range rationalisation across the two businesses, with a focus on brands. Weaker suppliers will find themselves increasingly exposed.