Tesco agrees deal with Booker Group in £3.7bn merger

By SME Insurance

Posted 02/03/17

Tesco has agreed to purchase wholesale retailer Booker in a £3.7 billion deal in its pursuit to create Britain’s “leading food business”.*

The Booker Group is the UK’s leading food wholesaler and comprises a range of businesses from Booker, Makro, to the convenience stores brands of Premier, Budgens, and Londis.** These stores operate on a franchise basis and are independently owned, however pay Booker for the branding, products, promotions, and logistical support. As Booker is a buying group, the business model means costs are kept down for independent retailers and Tesco believes the merger will provide Booker stores with more customers to sell to.†

As well as convenience stores, Booker Group supplies high-street restaurant chains and pubs with a wide variety of food produce. In total, the group supplies 700,000 convenience stores, grocers, pubs, and restaurants around the UK.* 

The deal by Tesco signals its interest in expanding further than just traditional food retailing. By combining with Booker Group, the supermarket will venture into restaurant and takeaway food sectors for the first time.*

Tesco chief executive Dave Lewis said of the merger “wherever food is prepared and eaten – “in home” or “out of home” – we will meet this opportunity with the widest choice and best service available.”*

Chairman of Patisserie Valerie, Luke Johnson, believes the merger could be “good news” for the restaurant industry which is facing rises in the national living wage, business rates and ingredient prices. He went on to add “The market is still fairly competitive in that there are Brakes and 3663 alongside Booker so I don’t fear too much for choice.”††

However Tesco won’t be entirely ignoring traditional retailing, food retailing analyst Bruno Monteyne from Sanford C. Bernstein believes that Tesco may choose to open fewer of its own convenience stores in favour of Booker Group stores which could lead to more opportunities for small business owners. “Franchises and wholesale are a lower capital form of growth so there may be fewer Tesco Express stores but more Budgens near you.”†† The merger will add 5,400 more stores to Tesco’s existing network of 2,900 convenience stores.†

It is currently unclear whether the Competition and Markets Authority (CMA) will investigate the transaction. Tesco’s share of the convenience retail market will increase from roughly 17% to 28% and its share of the total grocery market would rise by another 2%.

Dave Lewis, chief executive of Tesco is confident the merger will not face a challenge due to it being “low risk”. However other supermarket executives have told the BBC that the CMA “may not like the idea of one company’s products in so many convenience stores.”*

The news of the transaction was welcomed with keen interest by investors. On the morning the announcement broke (January 27th) Tesco’s shares rose 10% and it was revealed Booker shareholders will eventually own roughly 16% of the combined group.*

James Lowman, chief executive of the Association of Convenience Stores, said the merger is “hugely significant,” adding “Some retailers will welcome this news, others will be concerned about competing with stores supplied through the merged Booker and Tesco business.”*

The merger will sure up Tesco’s dominance in the retail market and follows Sainsbury’s purchase of Argos in 2016‡ in an attempt to diversify in a convenience driven digital age.*

 

Sources

*http://www.bbc.co.uk/news/business-38767862

** http://www.bookergroup.com

http://www.telegraph.co.uk/business/2017/01/27/tesco-buying-booker-does-mean-shoppers/

†† http://www.standard.co.uk/business/patisserie-valerie-s-boss-tesco-s-booker-buy-could-help-restaurants-a3453106.html

https://www.retailgazette.co.uk/blog/2016/09/sainsburys-acquisition-of-argos-parent-company-now-complete

Posted 02/03/17

Author: SME Insurance

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