With a combined buying power of £29m and the potential to put a key competitor out of business, it is little wonder the merger between Tesco and Booker has got the competition authorities worried. But Dave Lewis and Charles Wilson are not ones to take criticism lying down. Tesco and Booker have set out an impassioned defence of their merger plans in a 111-page dossier, published by the Competition & Markets Authority today. The Grocer looks at the key arguments raised by the potential partners.
1. Fears over reduced competition are misguided
The merger partners claimed it would be madness for them to try to reduce competition in the market.
In a joint letter introducing the lengthy document, Tesco CEO Dave Lewis and Booker boss Charles Wilson claim the markets they operate in are simply “too competitive” to allow the merged entity to dictate terms to suppliers.
“It has been suggested that the merged business might try to ‘divert’ sales from one part of the business to another by artificially ‘deteriorating’ the offer in either Tesco stores or to Booker retail customers,” says the letter. “We have absolutely no intention to do this … the operational, financial and reputational risks from such a strategy make no commercial or operational sense.”
2. And it won’t disadvantage suppliers
Despite a combined buying power of £29bn, Tesco and Booker claim fears over suppliers being bullied into agreements are way off the mark. Instead, they claim the merger will increase the competitiveness of the sector and opportunities for suppliers.
“Given the competitiveness of the retail and wholesale groceries markets, Tesco’s and Booker’s success is intrinsically linked to having thriving suppliers. Having strong suppliers with a mix of household names and innovative and exciting new brands is key for a retailer to satisfy consumer demands.
“Tesco and Booker enjoy good relationships with their suppliers. In particular, Tesco has experienced significant improvements in its relationship with suppliers in the recent past and this has been an essential component of Tesco’s strategy to regain overall competitiveness. The merger will reinforce this, as it will create significant opportunities and benefits for the supplier base through growth.”
One of the main procurement savings that Tesco and Booker hope to generate from the deal is the ability to more closely align buying terms from suppliers that deal with both companies, the document says.
“Given the negotiating power of branded suppliers, the merged entity will be able to achieve the projected procurement savings only by demonstrating to those suppliers that there is a justification for alignment of terms through genuine operational, ranging or logistical efficiencies generated by the merger.
“In relation to fresh and grocery categories (and own-label suppliers), given the minimal overlaps, the procurement synergies relate to sharing cost savings from working closely with suppliers to increase efficiency throughout the supply chain.”
It claims there is “no realistic prospect of a negative impact on competition” among suppliers as “the vast majority of branded suppliers have strong negotiating power and many supply powerful brands which all retailers are expected to stock.
“Equally, Tesco and Booker will not have an incentive to harm suppliers, hinder innovation or reduce their volumes of purchases, as that would damage the competitive position of Tesco’s and Booker’s customers at the retail level, where competition is fierce.”
3. CMA was wrong to discount the discounters
Tesco uses the document to make a frank assessment of the discounter threat to the traditional supermarket sector. Describing the emergence of Aldi and Lidl as a “revolution”, the document admits that the launch of Tesco’s Farms brands range, for example, was forced as a direct response to the discounters’ growth.
With Lidl this week overtaking Waitrose as the seventh biggest retailer in Kantar Worldpanel figures, Tesco says retailers across the sector have “experienced significant losses in consumers” at the hands of the discounters.
“This strong competitive pressure has resulted in the multiples significantly changing their offering to consumers. For example, Tesco introduced its Farms brands range in direct response to discounter growth. As well as having a significant impact on large retailers, Aldi and Lidl are also adapting their offering to compete more directly with players in the convenience segment.”
As Aldi and Lidl plan to ramp up store openings, Tesco argues the CMA should have taken the growth of the discounters into consideration in its assessment of the market.
“Tesco and Booker were surprised by the finding that the discounters should not be considered as ‘effective competitors’. We consider that there is strong evidence (and industry recognition) that Aldi and Lidl (and Iceland, which was also excluded) are effective competitors in the UK retail groceries sector and provide a strong and credible offering across all customer missions, including convenience.”
Indeed, the document later refers to particularly strong “primary competitors” - the identity of which has been redacted, but is believed to refer to Aldi and Lidl.
4. Palmer & Harvey threat is just “speculation”
The CMA last month vowed to launch a “thorough” investigation into the potentially disastrous impact of the merger on Palmer & Harvey.
The competition authority warned the deal could spell closure for P&H, which supplies and distributes tobacco products for Tesco, as well as all ambient non-tobacco products directly to all Tesco forecourts and all frozen products to Tesco Express stores. As such, the CMA ruled the merger could realistically result in a substantial lessening of competition.
But today Tesco and Booker described the CMA’s claim as “speculative”. “It is publicly known that P&H has been suffering financial issues for a number of years and has struggled for capital to keep afloat,” the potential merger partners said.
“It is clear that the business is facing a number of ongoing challenges. Nonetheless, Tesco has had a longstanding relationship with P&H for the distribution of a variety of products to its stores, and over the years P&H has gradually increased the scope of the services provided to Tesco and One Stop.
“Tesco considers that P&H is well placed to offer a combined package of services that Tesco values. P&H provides a good service and has a close relationship with the large tobacco majors, and is well placed to offer a combined package of services that Tesco values.”
The document references a quote by P&H managing director Martyn Ward that described Tesco’s merger with Booker as “an opportunity rather than a limiter”.
It adds: “In any event, Tesco considers that the evidence does not support a finding that the merger could have a negative impact on competition in the wholesale groceries market. The wholesale groceries sector is highly competitive with a number of strong and credible players providing delivered services.”
5. CMA’s theory of harm makes “no sense”
When announcing its decision to fast track to a phase two investigation, the CMA set out plans to focus on 369 local areas where Booker symbol group stores overlap with Tesco branches.
“In these local areas, the CMA believes that the merged entity could have the ability and incentive to worsen Booker’s wholesale symbol group offering, such that end-customers may switch to shop at Tesco instead,” said the authority.
Tesco and Booker claimed the theory simply “made no commercial sense”. “Even based on the highly unlikely hypothesis that a discriminatory deterioration of Booker’s offering would result in 100% of consumers at the targeted symbol group customers diverting to Tesco, there would still be no incentive to pursue such a discriminatory strategy,” it said.
“In particular, it would be commercially unviable. Booker’s symbol group customers are commercially minded retailers, so it would quickly become apparent that certain customers were being offered different terms based solely on their location and their local competitive environment. Indeed, Booker’s customers often shop at different Booker cash & carry business centres, and a number of them operate multiple premises or have friends and relatives who also operate symbol stores.
“A discriminatory strategy would therefore fundamentally damage the trust and reputation that Booker has worked hard to establish over many years with its symbol group customers and cause irreparable damage to the merged entity.
“Its impact would be much wider than the small group of customers targeted with any worsened offering and, at the very least, would present a real risk of a loss of profit in the long term.”
Essentially the strategy would lead to “minimal gains”, it claimed, while risking a customer exodus.
“There are a wide range of other retailers that they could switch to, including many not included in the CMA’s unduly narrow ‘effective competitor’ set (eg Aldi, Lidl, Iceland, unaffiliated independents, certain symbol stores and petrol forecourts).”
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