Tesco, one of the largest retailers in the world, is the most dominant supermarket in the UK market. Its recent announcement to merge with Booker was a surprise to all. Booker occupies a very different area of the market, primarily offering bulk-purchase supply to small retailers, both independent and franchised stores under brands it owns, such as Londis and Budgens. At first glance then, this seems an odd target for Tesco; to merge operations with a company whose target market is so different to its own. Indeed, no one considers Booker to be a threat to Tesco.
The media has focused on the increasing market share to come as a result of this merger; Tesco already occupies approximately 29% of the UK market and Tesco is often selected by the public to act as the face of the movement by supermarkets to dominate grocery supply. Tesco is known publically for having poor relationships with suppliers, and there are fears that this merger will increase its buyer power even further and result in farmers and suppliers getting an even worse deal than they have currently.
The ongoing supermarket price war has made moves like this something of a requirement, as the majority of customers use only a single supermarket and the recent rise of Aldi and Lidl has re-opened consumers’ eyes to the benefits of cheaper alternatives. This has also opened Tesco’s eyes to the importance of low prices to retain customers. There is a risk, in theory, that further concentration of the market can result in greater monopolization of the market, and result in weaker price competition and prevent price levels from remaining low. While this is a real risk, most consumers typically view them as bullies, forcing out long-established, small independent shops.
However, Tesco has another plan in the works, one that will benefit all players in the market; or rather, one that will benefit all supermarkets in the market.
As a major supplier to the majority of small independent businesses, Booker enjoys significant control over these companies. When this deal gets the go-ahead from the competition regulators – as it probably will, because Tesco will not be taking on any additional stores as Booker’s stores are franchised – Tesco will be able to exercise this control. In theory it would be able to manipulate supply to such an extent that many small businesses will be unable to continue trading. The main cause of the resistance to supermarkets in the UK, as previously mentioned, is the feeling that supermarkets are pushing out smaller businesses. If Tesco manages to force most of its small competitors out of business, then in several years’ time there will be no alternative to large supermarkets and the resistance will lessen. In a market as highly saturated as this, most large players will see this as a godsend and are likely to offer little to no resistance to the planned merger. While this move will not benefit Tesco specifically in the long-run – and indeed, offers a significant risk of weakened public relations in the short-term for Tesco – it will benefit most, if not all, large players in the market.