Costcutter’s interest in switching distribution to Palmer & Harvey - the UK’s biggest wholesaler - has been rumoured for years.

Talks first took place between P&H and Costcutter’s then chairman Colin Graves as early as 2007, following Costcutter’s spectacular falling out with Nisa. And negotiations with Sir Michael Bibby commenced in October 2009.

Yet, with its 10-year Nisa contract up for renewal in 2014, the deal unveiled last week still managed to surprise the trade. Announced at a hotel on the outskirts of Birmingham, and relayed live to retailers gathered in seven cinemas across the UK, Costcutter’s tie-up with P&H has the potential to shake the sector to its core.

If the decision to sign an eight-year wholesale distribution contract with P&H is a straight swap in terms of logistics, the mechanics of the deal are anything but, with the creation of a 50/50 joint venture between the two companies, called The Buyco, boasting a purported buying power of £5bn,

But what does the new partnership mean for the two parties, for rivals and for independent retailers? And, more importantly, will it work?

According to P&H MD of commercial and sales Martyn Ward, “the sole reason for The Buyco’s being is value through volume,” working closely with suppliers to negotiate the best possible prices.

And the roles of the two parties are clearly defined. Taking control of P&H’s Mace, SuperShop and Your Store fascias via a licensing agreement, Costcutter will become the UK’s second-biggest symbol group, operating 2,500 stores under seven fascias.

That will free up P&H to buy the products and deliver them to retailers, who will then be invoiced by Costcutter.

Key points

  • Costcutter and P&H formed a 50/50 joint venture company called The Buyco to negotiate better prices, products and promotions
  • From 7 April, P&H will licence its retail interests - Mace, Supershop and Your Store - to Costcutter in perpetuity. Costcutter will become the UK’s second-biggest symbol group with 2,500 stores under seven fascias
  • Costcutter signed an eight-year wholesale distribution agreement with P&H from July 2014

Costcutter has identified savings of £20m from the new arrangement. CEO Darcy Willson-Rymer explains: “P&H has 10 nationwide depots, and already makes 60,000 deliveries per week. By filling trucks with more goods, it naturally becomes cheaper. So, while some of that money may be used for the brand and marketing, it puts us in charge of our destiny, and is a win-win-win, a transformational deal that will really shake the sector up.”

Response to the new proposition has been excellent, he adds. “Costcutter members helped design the strategy, and are now in control of their own destiny. They are tremendously excited about the possibilities for an enlarged and empowered group.”

The tie-up has also attracted praise from some independent quarters within the sector. “This option is brilliant,” says one senior convenience source. “P&H is a real force in distribution but Mace never really registered on the Richter scale in the independent store sector. So by handing their stores over to Costcutter, they will both be able to concentrate on what they are good at.”

Kash Khera, director of franchise retail group SimplyFresh, which has a supply agreement with Costcutter, is also supportive: “SimplyFresh is committed to the new deal and will seek opportunities within The Buyco in the near future.”

Others are less impressed, however. “Having scale doesn’t actually bring suppliers any benefit unless the retailers themselves change their behaviour, and I fail to see how they will do so,” says a senior wholesale source.

And a Costcutter retailer wrote on after The Grocer broke news of the deal earlier this month: “All I’m saying is I will leave Costcutter. So bye Costcutter hello to Nisa.”

How many more will follow suit? While the loss of the Costcutter business will shave around £500m off Nisa’s £1.5bn turnover, it is expecting at least a third of Costcutter’s members to defect before next year when the Nisa/Costcutter contract runs out. “I think it’s good for Nisa,” adds one convenience operator. “There will be a flood of retailers moving from Costcutter to Nisa - I’ve heard as many as 300.”

And although Costcutter and P&H claim its £5bn buying power is “unrivalled”, around three quarters of P&H’s £4.3bn turnover comes from tobacco contracts with the major multiples. Meanwhile, Booker’s Premier, already the UK’s biggest food and drink wholesaler, will further boost its buying power to £4.6bn when its acquisition of Makro gets the green light from the Competition Commission next month.

Willson-Rymer believes member concerns will vanish, however, once they grasp the compelling nature of the deal on the table. And he also dismisses talk of potential competition issues, “Our contracts are not exclusive. You can serve notice and leave at any time. So there’s a natural tension to get members the best prices. And with better prices, they will naturally buy more from us.”

A senior P&H source adds that rivals should be wary of referring the deal to the competition authorities. “We’ve taken advice. If rivals want to investigate, they are welcome to do so, but they may find their own arrangements under greater scrutiny as a result.”

Willson-Rymer also promises a 700-strong own-label range, to be launched this summer, will “blow our rivals away.”

With fresh and chilled “at the top of the shopping list”, the new range will be “comprehensive” and “offer the best choice and value in the independent sector bar none.”

And he adds, confidently: “Let’s wait and see how many members leave. We’re focused on what our members are asking for. If we deliver, I’m confident we will switch next June with the same number we have today, if not more.”