There are interesting manoeuvres taking place currently among the largest supermarkets in the world. Over the past couple of months, Tesco, a UK based retailer, and Carrefour, a French domiciled international retailer have announced joined sourcing expenditure plans for their respective businesses. Tesco and Carrefour have a combined annual turnover in excess of €130bn. Together they employ over 800,000 people in over 19,000 stores across ten countries in Tesco’s case and 33 in the case of Carrefour.
Why combine sourcing expenditure?
The companies have a limited overlap in their operations (purple) and where they do overlap in terms of market presence it is often through holdings in companies or a wholesale vs retail presence (or different segments within retail – convenience store vs. supermarkets etc.). This is important for competition reasons, especially within the EU.
Blue: Carrefour market presence | Red: Tesco market presence | Purple: Both groups present in market
The companies are responding to the entry into the retail / fresh food sector by Amazon, the global technology, and supply chain giant. Amazon’s global revenues are approximately €150bn and they employ some 566,000 people across the world. They have some €120bn or so in assets on their balance sheet (vs. approximately €90bn for Tesco/Carrefour).
The long-term trend, in the absence of anti-trust measures of one form or another against Amazon or indeed large supermarket multiples, is for Amazon to continue to expand its span of operations and market presence. This presents major challenges to existing retailers not least in their spending power.
Combining sourcing expenditure
The link-up between Tesco and Carrefour is for the express purpose of deriving greater value from their suppliers so they can meet the challenge of competing with Amazon head-on. Amazon has immense purchasing power and can negotiate large deals demanding significant economies of scale from companies listing their products with them.
Tesco and Carrefour have confirmed their intention to consolidate their sourcing expenditure and in particular use their power to develop own brand products and negotiate even better discounts with mega-producers like Kraft, Proctor & Gamble and Unilever.
This unprecedented move may have some serious consequences for suppliers down the line. A race to the bottom on supplier pricing brought about by bidding wars to stay on the supplier listings could have negative ancillary effects, especially in markets like France, Spain and the UK where these high street stores are dominant and already, in the UK at least, facing the Amazon onslaught.
There will be fewer supplier listings across the board as they jointly develop own brand lines and on shelves where they seek to feature suppliers that can satisfy volume and quality requirements across their network and within countries.
Even with large organisations like Kraft and Unilever, they buy raw materials like milk, sugar etc. for their products. If they come under price pressure, this too will be passed through in full or part to suppliers.
The new disrupting the old
Amazon’s disruptive capabilities for retailers are being taken seriously because they have strong expertise in sourcing and distribution. They are also well enough resourced to be able to fund this venture. Not all forays from tech giants into other markets (e.g. see their efforts in the automotive industry) will necessarily work, but some will. Where they succeed, they will seek to run the most efficient operations possible which typically means more automation and less employment of human capital.
It remains to be seen whether giant firms like Tesco and Carrefour can resist the onslaught of the American technology giants.