Tesco-Booker Deal: Significance For Shoppers And Small Independent Retailers

Significance of the Deal for Small Independent Retailers

Tesco is one of the leading retail supermarket chains of UK that has over 2,300 of small and big departmental stores spread across every nook and corner of the country and also abroad (Gomes et al.2011). The company sells everything from fast moving consumer goods like soaps, toothpaste and toiletries to clothes, footwear and even  household electronic items like TV, Music systems etc to name a few. In the recent past the company had been mired in an accounting scandal that dented its reputation along with a sharp fall in sales (Ahern 2012). Quite recently as a part of a strategic initiative it decided to takeover Bookers, a wholesale major for £3.7 billion hoping to make it the largest food retailer in the UK. Booker is one of the largest cash and carry wholesalers that supplies to over a hundred thousand small retailers located in the UK (Wood, 2017). So clearly this move is a classic example of backward integration on the supply chain that would have major repercussions on the business profits of small retailers and perhaps usher in an era of monopoly power in the retail sector. The decision of Tesco to acquire an upstream company on the supply chain is a move that is being closely monitored by the regulatory watchdogs who want to ensure free and fair competition in the retail industry of UK (Beladi, Chakrabarti and Marjit 2013). This report outlines some of the significances of the deal both for the shoppers as well as other smaller independent retailers.

Booker is the major supplier for small retailers who depend on it for bulk purchases and also for IT and logistic support. It has over 170 depots located at various parts of the country. The smaller retailers are on the payrolls of Booker for services like branding and also access to some niche products and in this way the group of independent retailers have managed to keep their operating costs down and hence the margins high (Cartwright and Cooper 2012). Apart from this the company has a mammoth food service department that supplies to major restaurants, eateries and pubs. It also has a formidable online presence that sells movie tickets and also handles the online sales of niche retailers like Marks and Spencer. Thus it can be seen from these facts and figures that Booker occupies a significant position as a supplier in the UK retail trade industry (Chatfield et al.2011).  Now the major question is how this deal is going to affect the fate of these small traders and what new strategies Tesco would adopt to reign in market share from the independent retailers. There is clearly an issue of conflict of interest for some parties in this mega trade deal that has happened in the last six months.

Implications of Backward Integration

This is a well known strategy of backward integration that gives a lot of competitive advantage to Tesco like gaining control over the vendors and bringing down the costs while improving the efficiency of the supply chain. It gives Tesco the direct control over greater part of the supply chain thereby enabling it to beat competition from small and independent retailers. It gives the company a clean access to the raw materials and this sometimes tend to create monopoly that is forbidden by the competition commission of the country. It leads to formation of cartels among big companies to exert control levers on the suppliers which is again forbidden by the laws of the nation (Gomes et al.2011). Clearly a backward integration move aims to control costs by removing middle men from the supply chain who marks up the products in order to make a profit for themselves. Since the cost is saved the same can be passed on to customers for lesser prices and hence it is a win-win situation for both the company as well as the customers. It gives more convenience to distribution of goods from the manufacturers to the buyers. It clearly gives more latitude and control to Tesco as it can now more rapidly respond to customer’s changing needs, demands and requirements since it owns the production units by itself. It can also give a great competitive edge over smaller independent retailers due to more efficient marketing strategies and also smoother distribution process (Gupta  and Malik 2012). It can effectively deal with greater demand and rush from the customers during the peak season as it now has greater control over the distribution chain. The strategy of backward integration also helps in product differentiation as valuable inputs could be given to the production units by giving them information about the customers’ buying behaviour. Thus Tesco, which is already the number one retailer of the country, would stand to capture even larger portions of the market share thereby creating a tendency towards monopolistic competition.

 For Tesco it’s apparently a move to make a novel entry into the food retailing business since Booker is known to be a behemoth in the food retail sector. It is interesting to note that the food business is a new domain for Tesco although it accounts for roughly a third of Booker’s sales revenue. Thus it is a smart strategy on the part of Tesco to enter the food retail business saving costs and also hoping for good return on the investment only a few years down the line if everything goes well (Haucap et al.2013). According to Tesco the move is expected to reduce food wastage by improving the efficiency of the supply chain from the farm to the supermarket. It also believes that the independent retailers would also stand to benefit from the deal as suppliers would have more buyers to sell to. They would in fact get more choice from the suppliers. Some of the food suppliers enjoy greater margins by supplying to caterers and cash and carry units than to big supermarkets that squeeze tight profits over them. Thus it may be bad news for food suppliers if the deal makes through as the small suppliers’ bargaining power would be lost.

Tesco's Strategic Move into Food Retail Business

Thus it is almost inevitable that the deal would come under the scrutiny of competition and markets authority (CMA) since it is a sensitive issue for the smaller independent retailers. The critics of the deal are already pointing out that the deal is a part of a clever strategy by Tesco to dominate the markets under the guise of entering the food retail business which is currently booming in the country as more and more people prefer to eat out rather than eat home made food (Howarth and Sadeh 2010). At least that is the way in which Tesco is putting forward the deal in the eyes of the public. It is most certain that the deal could have much bigger implications for small independent retailers in the near future as Booker has been their major supplier and now with the merger they would be at the mercy of Tesco. Tesco CEO has been trying to sideline competition issues and conflict of interest by saying that Booker operates its flagship stores on a franchise model and hence they are not interested in creating more stores in and around the country. But the regulatory watchdogs are sure that the deal would come under close scrutiny by the CMA since too much dominance by a single large player in the retail industry would invariably have a strong influence over the pricing and promotion decisions in the shops (Moore et al.2010). All the while Tesco is trying to downplay the competition issues even at the same time it has hired the services of top anti-trust lawyers and deal makers to help navigate through the deal. The deal is not expected to close till mid 2018 as the CMA would begin investigations regarding the fairness of the deal and that it does not breach the competition and anti-monopoly laws of the nation. The small retailers and suppliers are worried over losing their bargaining power as Tesco is known for its strong arm tactics while dealing with retailers. They fear that the combined entity would squeeze out their margin unduly and hence this is a source of major concern for them. Hence the role of the regulators in approving the deal is going to be critical over the coming months as the terms and conditions of the deal would be laid down on the table.

In particular the regulators would take a closer look at Tesco wholly owned One Stop chains that would be competing directly with Booker’s retail franchises. Here raises the question of corporate governance issues over the board structure of the merged unit and questions like who would be the independent director and who the executive director. These issues have still been kept in the dark by Tesco whether intentionally or unintentionally it is not known (Muehlfeld, Weitzel and Van Witteloostuijn 2011). The model of convenience and franchise ownership is big test for the deal. It has been argued by the experts that One stop is a shadow brand of Tesco and thus they try to keep the prices high. The position of Booker’s retail franchises is still hazy as no one knows whether they would be operating independently or would serve as the suppliers of Onestop. This would set up dubious board structures of the merged entity which would throw the shareholders in the dark (Madura, Ngo and Viale 2012).

Competition and Regulatory Issues

But for the shoppers it would mean greater choices of products by combining the resources of these two giant companies. They would get more flexibility in terms of product selection and the combined entity would be better equipped to spot the trends of the purchasing pattern of the customers and then quickly respond by revamping the product line as the manufacturing and production units would be under their direct control (Starks and Wei 2013). By sharing of the capital and technical resources of Booker, Tesco would be in a better position to grab a larger share of the online retail trade. The food and grocery retail business in particular would enjoy the benefit of 8000 click and collect points that would give a tremendous boost to the customer’s shopping experience. The company would be able to spot and respond quickly to the changing needs, demands and preferences of the customers so that they can be better satisfied and hence in a better position to come out with new and novel product. Thus the new deal would be a welcome move from the point of view of the customers as they would get better exposure to all kinds of products particularly in the food sector (Wang and Moini 2012). Thus it can be seen that the deal is good from customers’ perspective as prices would drop due to a more efficiently managed supply chain.

Conclusion

Thus the big question this essay addresses is whether the deal overrides the competition laws of the country or not. The answer would come in the due course of time after the deal is examined by the regulatory watchdogs for possible misuse to create a monopoly. Since the announcement of the deal the share prices of both Tesco and Booker has risen showing optimism from some quarters about the benefit of the deal. The apparent reason for this deal from the part of Tesco is to enter the food service sector since Booker is already an established brand in the food industry while Tesco is new market entrant (Wang and Moini 2012) .Thus it can be seen that there are two sides to this deal: one regarding the efficiency of the supply chain and the other to squeeze the margins of the small independent retailers. The dilemma faced by the regulators is that Tesco is already a market leader in the retail sector and more dominance and powers enjoyed by it would send negative signals to the other smaller industry players on the whole (Wood 2013). Some of the experts believe that for these reasons the deal may fall through and never materialise. On the other hand there is clearly an advantage for the consumers as they would get better access to their choicest products at reasonable prices.

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