Seismic shifts in wholesale

There is a whole range of reasons why one business might decide to merge with another: delivering economies of scale, boosting efficiency, diversifying into new markets, accessing new customers – and these will all have been considerations when Tesco agreed a £3.7 billion deal to buy food wholesaler Booker Group in January.

The potential takeover, which – if passed by the competition authorities – will marry the UK’s biggest retailer to the country’s largest wholesaler, unsurprisingly sent shockwaves through the grocery industry. Not only did it concern the two giants’ closest retail and wholesale competitors, it also raised fears that smaller players will no longer have the buying power to survive. This triggered a string of takeover bids, supply deals and rumoured mergers across retail, wholesale and convenience as companies scrambled to respond to the industry’s changing landscape and strengthen their place in the market.

First there were Sainsbury’s talks with Nisa; next came Morrisons’ supply deal with McColl’s and the relaunch of the Safeway brand; then there were (subsequently denied) rumours that Blakemore was planning to sell its wholesale business to Bestway; Costcutter said it would announce a deal shortly; and just last week the Co-op entered exclusive talks with Nisa, swooping on the convenience chain after its talks with Sainsbury’s were shelved in mid-August.

While the Tesco-Booker deal appears to have been the catalyst for this rush for consolidation, it would be overly simplistic to say these subsequent deals were merely a knee-jerk response to the landmark takeover. There are several factors at play here and the overall context of the grocery sector is important to consider. Brexit, exchange rates, the rise of the discounters and the supermarket price war have all been factors, according to Jonathan Buxton, head of consumer and retail at financial advisory, Cavendish Corporate Finance.

“Consolidation allows grocers to invest in companies, which will dispel inefficiencies in the supply chain and enable them to absorb more price hikes, preventing a further loss of market share to discounters, such as Aldi and Lidl,” Buxton explains. “The grocery industry has recently had to contend with a decline in consumers’ disposable income, volatile consumer confidence due to Brexit, a falling pound against the dollar and the supermarket price war. This has led to discounters gaining ground in this sector, with their market growth accelerating and their customer base increasing.”

Looking more specifically at the benefits retailers are looking to get out of these deals, achieving economies of scale is obviously a big one. While the profit margins are relatively low at some of the cash-and-carry operators involved, these wholesalers offer retailers the opportunity to control a larger part of their supply chain, widen their access to consumers, rationalise their logistics operations, and “secure improved deals with suppliers through larger contracts and long-term agreements”, says Ashley Clarkson, an agriculture and food specialist at economic advisory Grant Thornton.

The other major draw of taking over a convenience chain like Nisa or Costcutter, or a wholesaler like Booker, which owns the Premier, Budgens and Londis convenience-store brands, is that it gives supermarkets a route into the burgeoning convenience sector, which is set to grow by 18 per cent in the next five years, according to a recent IGD report. As UK consumers, particularly millennials and those living in cities, move away from doing a weekly shop to shopping little and often, the major supermarkets have been keen to expand their convenience store network. By purchasing wholesalers, which have convenience stores in prime population-dense locations, the multiples can easily “absorb these stores rather than having to jump through the legal hoops involved in opening their own,” Buxton points out.

As for the impact that all this consolidation is likely to have, there are fears it may lead to nepotism between wholesalers and the grocers that purchase them. If the trend continues, “we may run the risk of wholesalers reducing the services they offer to certain stores in an effort to drive customers to the grocer who purchased them,” Buxton says, and he expects to see more acquisitions of the same nature from the big four as they compete not only with one another, but also with tech giants, like Amazon, who are beginning to encroach on their markets.

The other unfortunate consequence, as previously mentioned, could be that some smaller wholesalers are forced out of business. “It might make it difficult for some of the really small businesses – people that have a shop and maybe do some deliveries as well,” says Damian Howarth, whose own Scarborough-based wholesaler Stuart’s Foods recently bought out fellow Yorkshire supplier S Clift. “They may not have the buying power to be able to work with the importers because they’re not buying in great volume,” he explains.

Although Howarth’s business does not fall within this bracket – following the takeover Stuart’s has extended its delivery reach to around 7,000 square miles – it too was keen to limit the impact of the Booker deal. The managing director hopes that by increasing the company’s turnover and widening both its reach and its product portfolio, he will attract new suppliers and begin to compete against some of the national suppliers. “We want to compete against national suppliers that don’t just deliver fruit and veg but also other product lines,” he says, “companies like Bidfood that can offer an all-in-one package.”

Despite such pressures and concerns, there is also a belief that the spate of recent dealmaking could have a positive impact on the wholesale sector. “We believe this is a positive thing for the sector,” says McColl’s chief executive Jonathan Miller. “The professionalising of operations and improving quality of products in the convenience channel will undoubtedly have a positive effect on customer perceptions.”

But before we can assess the eventual impact of this consolidation, there is a lot still to be settled in the short term. With the exception of the McColl’s supply arrangement, none of the deals mentioned have been finalised and further activity is likely to depend on the outcome of the Competition and Markets Authority’s ongoing probe into the Tesco-Booker merger.If approved, we could see a seismic shift in both the wholesale and convenience sectors.