Procurement Sourcing

Combining Sourcing Expenditure – Tesco and Carrefour take the fight to Amazon

By 15th August 2018 No Comments
Sourcing expenditure

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 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. Firstly, they are national champions in many ways and secondly, the purchase from suppliers from around the world. While it is unclear whether this will have a negative impact on competition, the EU has the FANG companies in its crosshairs. Companies like Amazon drive consumer value but they have also driven wholesale change in the high street. While money talks, the desirability of these changes over the long term is open to discussion and debate.

Sourcing expenditure

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).

In the absence of anti-trust measures, Amazon will 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 Tesco/Carrefour deal will seekgreater value from their suppliers so they can fend off Amazon. Amazon has immense purchasing power. It 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.

 

Supplier consolidation

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 work. Where they succeed, they will seek to run the most efficient operations possible which means more automation and less jobs.

It remains to be seen whether giant retailiers can resist the onslaught of the American technology giants.

 

More help on sourcing and procurement

We also have lots of experience in sourcing and procurement across all spend categories.  So, check out our Procurement Sourcing services to see how we can help with your procurement needs. Not only that, you can also search for ‘Procurement Sourcing‘ articles on our blog.

Public buyers in Ireland can get more advice from the Office of Government Procurement on the best tendering procedure to use and you can use etenders.gov.ie to request a tender. Likewise buyers in the UK can find the best tender portal for them by checking our handy list.