(Bloomberg) -- Tesco Plc is forming a purchasing alliance with French retailer Carrefour SA to increase its leverage with suppliers in a consolidating and price-squeezed supermarket business.
The alliance between two of Europe’s largest retailers, with combined annual sales of about $171 billion, aims to enhance the companies’ clout in buying branded goods and private-label items as competition from discounters like Aldi and Lidl ramps up.
The planned partnership is the latest cross-Channel cooperation between U.K. and French companies even amid the looming uncertainties of Brexit, following a deal last year between Casino Guichard-Perrachon SA and grocery e-commerce technology provider Ocado Group Plc.
Tesco and Carrefour spend roughly $105 billion a year on products they sell to customers, Jefferies analysts led by James Grzinic said in a note. That suggests that even small improvements could quickly lead to total savings of more than $500 million, they said.
European supermarket operators have engaged in a flurry of acquisitions and alliances in an effort to reduce supply costs. In the U.K., grocer J Sainsbury Plc plans to buy Walmart Inc.’s Asda, while France’s Auchan Retail International SA, Casino and Schiever Group said last week that they’d combine forces with Germany’s Metro AG in purchasing. That adds to deflationary pressures that food producers such as Nestle SA and Unilever are facing, as U.K. grocers wrestle with the added effect of a weak pound stemming from the vote to leave the European Union.
The agreement should be concluded within two months and will last for three years, Tesco and Carrefour said in a joint statement Monday.
“It’s a defensive move,” Bloomberg Intelligence analyst Charles Allen said. “There is little growth in the U.K. or France, so Tesco and Carrefour are trying to eke out every bit of savings they can.”
Berenberg analyst Dusan Milosavljevic said by email that he’s skeptical on the deal, observing that “the buying synergies for cross-national deals in food retail have been very difficult to realize historically.”
Tesco bought wholesaler Booker Group Plc, which supplies thousands of convenience stores, in March. Under Sainsbury’s $10 billion bid for Asda, the combined entity plans to fund 10 percent price cuts across grocery essentials such as bread and milk by buying across the group at the lowest price enjoyed by either of the individual retailers.
“For suppliers, this is another signal of battles ahead,” GlobalData analyst Patrick O’Brien said in a note. “Sainsbury’s and Asda have made it clear that it will target its largest suppliers for cost reductions by flexing their increased scale, and Tesco and Carrefour will look to do the same.”
Under Chief Executive Officer Alexandre Bompard, who took over last summer, Carrefour has moved to beef up its e-commerce operations and to reduce the company’s dependence on suburban big-box stores. Competition in France has been heating up, with Casino in March announcing a deal to sell products from its Monoprix stores via Amazon.com Inc.’s Prime service in the Paris area, after the earlier deal with Ocado.
Tesco is targeting an operating margin of between 3.5 percent and 4 percent by 2020, up from 3 percent. The Jefferies analysts said the purchasing pact should be more accretive to Carrefour than to Tesco, given the French company’s lower margins of around 2.5 percent.
Tesco and Carrefour said their alliance will let the companies improve the supply of goods available in stores. The agreement will also cover purchasing of goods not intended for resale, a category that Jefferies estimates at more than $5 billion for the combined companies.
Carrefour shares were flat at 13.87 euros at 11:37 a.m. Monday in Paris trading, while Tesco shares were up 0.4 percent to 257.70 pence in London.
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