Tesco's Carrefour Deal Should Add €50bn in Sales

Strategic alliance will give UK supermarket enhanced buying power as it faces up to the challenge posed by the Sainsbury's-Asda merger

Ioannis Pontikis 2 July, 2018 | 2:56PM
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Tesco has done a deal with Carrefour

Tesco (TSCO) shares rose today as it announced a strategic purchasing alliance with French supermarket giant Carrefour (CA) on own-brand products and goods not for resale. Morningstar equity analysts view this imminent partnership as a net positive for both constituent parties due to mutually beneficial purchasing efficiencies, with Carrefour benefiting the most in our opinion from Tesco's market-leading expertise and rich own-brand experience. We maintain our fair-value estimates of 230p and €17.9 fair value estimates for Tesco and Carrefour.

For Tesco, we think the deal comes as a response to the Sainsbury's-Asda proposed merger, which gives the merged entity unprecedented buying power with a combined market share of 31.4% versus 27.6% for Tesco, according to Kantar data.

Three-star rated Tesco will benefit from higher efficiencies and enhanced buying clout flowing from an additional £20 billion worth of sales in own-brand demand. High customer awareness of great quality and cheap private-label products, in combination with the imminent threat coming from a combined Sainsbury-Asda entity and the continuing growth of hard, means that grocers that are better positioned to offer high-value own brands should gain an advantage over competition.

For Carrefour, this new partnership follows a series of initiatives taken by new management to bolster up the grocer's buying clout and purchasing efficiencies, as part of its transformation plan announced back in January 2018. This involves a buying alliance with System U – with more than 30% combined grocery market share in France – in several product categories, including fresh produce.

Now a long-term buying alliance with Tesco focused on private-label goods will provide more than €50 billion of own-brand sales for Tesco and Carrefour combined, on our calculations.

Savings that will flow from this partnership are included in Carrefour's 2020 target of €2 billion in cost savings and will give the firm ample leeway to address its less competitive price position.

Finally, the agreement could encompass all categories – food, nonfood, fresh – based on purchasing conditions but will not affect local or regional suppliers. The alliance will be formally sealed within the next two months.


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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Carrefour13.72 EUR-0.62Rating
Tesco PLC307.80 GBX-0.19Rating

About Author

Ioannis Pontikis  is an Equity Analyst for Morningstar

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