Why it’s time to merge for the UK’s big grocers

 —  Article by Emily Perryman
supermarket aisle in the UK
Image credit: Shutterstock

More of the UK’s well-known food retailers are looking to strengthen their position in a competitive and fast-changing market by merging with complementary businesses.

At the end of January, supermarket giant Tesco announced a surprise merger with foodservice wholesaler Booker. The £3.7 billion deal will bring together Tesco and Booker’s retail and wholesale operations, as well as their supply chain and digital capabilities, into one combined group.

The companies claim the enlarged corporation will be well-placed to serve the “in home” food market as well as the faster growing “out of home” food market. “The combined group will be able to provide greater choice, quality, price and service in the food market, whilst improving efficiency and reducing food waste,” Tesco says.

A different expansion approach

Tim Vallance, Head of Retail & Leisure at JLL UK, says the deal is part of a wider trend for grocers – and retailers more generally – to grow their businesses through mergers and acquisitions rather than through organic store-by-store or smaller acquisitions.

The Tesco deal follows Sainsbury’s takeoverof Argos owner Home Retail in September 2016.

“We can’t pretend that 2017 won’t be a tough year for retailers with headwinds including rising costs and falling consumer confidence, however those that are innovative and customer-centric will remain resilient and prosper and we expect to see further similar activity amongst the big four as they continue to vie for domination of the sector and adapt to the evolving way people shop,” says Vallance.

A changing market

In recent years supermarkets have had to contend with competition from convenience stores, a squeeze on household income and a stiff price war. According to Sir Stuart Rose, former Booker chief executive, the combination of overcapacity with pressure on prices, costs and margins look set to drive further consolidationin the market.

Fitch Ratings says deals like Tesco’s reflect the limited prospects for organic growthwithin the mature and highly concentrated food retail sector.

“They also provide ways to diversify into other growing retail channels, improve logistics and digital services and improve the use of store space,” the ratings agency says.

New market opportunities

Consolidation is also a response to the changing eating habits of UK consumers. There has been a huge growth in eating outin recent years, with British consumers spending £52.2 billion at food service companies in 2015. This figure is estimated to grow to £53.3 billion in 2017 and £54.7 billion the year after, according to NPD Group.

However, while food retailers eye the M&A approach to stay on top of their game in a changing market, caution prevails in other retail subsectors. Last year, 36 mergers were agreed, down from 47 in 2015, to hit a three year low, according to law firm RPC, amid the revaluation of business rates, the pound’s volatility and rising employment costs.

With Brexit discussions set to dominate 2017, concerns over consumer spending across the whole retail spectrum are looming large.

Mark A. Smith, Head of Central London Retail Agency at JLL, says: “In the face of such uncertainty, it is hardly surprising that economists are watching intently for signs of dwindling consumer spending, particularly given that UK retail sales growth is forecast to dip to 2 percent in 2017, from an average of 4.1 percent over the last three years, according to Oxford Economics

“However, the proposed reduction in consumer spending will not be uniformly felt across the country, with major retail centres such as Central London likely to demonstrate ongoing resilience, at the expense of less relevant centres that have been slow to respond to both cyclical and structural change.”

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