Tesco and Booker to merge

The announcement that Booker and Tesco were to merge, in reality a takeover of Booker by Tesco, was a surprise. The announcement signals a new way of thinking by Tesco and may have significant implications for the grocery sector.


The simple justification for the merger is that the retail grocery market in the UK is growing slowly and with increased competition from rival retailers and channels to market; Tesco’s opportunity for growth within this market is limited.

By merging with Booker, Tesco is opening itself up to a whole new market which it has dubbed the ‘out-of-home’ food market, which it estimates is worth around £85 billion. Trends in the market mean that the lines between retail and foodservice are blurring, with the convenience sector being a prime example, and Tesco is not satisfied with half the pie, it wants to be the dominant food provider whether it is purchased in its own stores, independents, or through foodservice providers.

Access to this new market doesn’t come cheap and Booker, presumably, was offered a price it couldn’t refuse. Tesco is paying £3.7bn for a business which generated sales of £5bn and made profits of £151mn before tax and £128million after tax. So Tesco is paying 29 times historic earnings.

Increased buying power

Of Booker’s £5bn sales 61% comes from retailing customers. Just under two fifths comes from the growth area of food service. It’s also worth remembering that 31% of its sales come from tobacco, a market which is exceptionally low margin and is in decline. Tesco highlighted that Booker is currently fourth in the market in terms of wholesale food service, and this is the area the combined operations will look to grow into.

As the largest grocery retailer within the UK, Tesco has strong buying power in the market. However add to this the largest cash and carry provider and its buying power increases. Tesco believes that this is a positive for suppliers as well, as Tesco can now buy full crops of produce, limiting food waste and increasing revenues for suppliers. It also opens up new relationships for Booker and its clients by allowing the retailer access to new suppliers and products. Booker CEO Charles Wilson also noted that Tesco has a fleet of around 5,200 vans compared to Booker’s fleet of 1,200 and therefore Booker will have access to a far more developed supply chain allowing it to better serve current and prospective clients. This is perhaps the major synergy that will be opened up between the two businesses.

What it could mean for the convenience sector

Tesco is the market leader in the convenience retail sector whilst Booker operates and serves the largest symbol and member group network with almost 5,000 stores under its Premier, Family Shopper, Budgens and Londis brands. The combined operation would hold, on a pro-forma basis, some 27% of the convenience market, double that of its nearest rival Co-op. This is the key reason why the deal will face an investigation from the Competition and Markets Authority (CMA). Tesco argues that as Booker does not own stores outright then there is no conflict, however we feel the CMA may see it another way.

Although the CMA will investigate, should the deal come through it is likely to be positive for member stores under the new business, and conversely a dangerous threat to the rest of the market.

Dave Lewis has already talked about introducing Payqwiq, Tesco's mobile payment system, across the combined estate and this is a good indication that Tesco will be looking to share its innovations with its new symbol members. This will greatly improve the symbol fascias competitiveness within the market and put considerable pressure on smaller rival operations that do not have the backing of a multiple. There are a myriad of other potential opportunities for Tesco to utilise the scale of its new network, such as click-and-collect of Tesco Direct orders through a far greater network, although Dave Lewis is currently keeping his cards close to his chest in terms of how integrated the network of owned and member stores will be.

Does it make sense?

A trend of 2016, and now 2017, has been the larger grocery multiples looking for new ways to generate growth within their operations. Morrisons has turned supplier, partnering with Amazon and relaunching Safeway as a wholesale brand. Sainsbury’s acquired Argos and Habitat for the sum of £1.4 billion to develop its non-food offering and shift the group’s dependence away from its core business.

And now Tesco has shown its hand. With the deal valued at more than twice that of the Sainsbury’s /Argos deal, it is an ambitious one but equally one with more direct synergies. The lines are blurring between grocery retail and foodservice and the combined buying power of Booker and Tesco will mean cost savings in a market where margins are likely to be stretched in the medium term due to the devaluation of Sterling. The major opportunity for both will be growing Booker’s wholesale business to catering and other business clients, and the ability to better negotiate with suppliers, and utilise a more developed supply chain, will prove attractive for current and potential clients.

Overall it is hard not to be impressed by Tesco’s logic behind the deal and the bold manner it has gone about it. This is not the Tesco of three years ago that was struggling to keep its market share; this is Tesco on the attack looking to gain share in completely new markets. This is also not simply an acquisition to add short term growth but an acquisition which lays the foundation for the Tesco of the future, and therefore it is now up to Dave Lewis, Charles Wilson and the rest of the combined teams to capitalise on its new vision of grocery retailing of the future.

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