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
Facebook Twitter LinkedIn

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.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Carrefour15.00 EUR-2.94Rating
Tesco PLC357.20 GBX-0.61Rating

About Author

Ioannis Pontikis  is an Equity Analyst for Morningstar

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures