An influential credit ratings agency believes Tesco’s strategic alliance with French grocery giant Carrefour and Sainsbury’s proposed merger with Asda could place pressure on smaller grocery retailers.
Moody’s said the deals would squeeze suppliers, who will then look to make up lost profits from smaller grocers such as Iceland and Ocado.
“Lower purchasing costs for the retail alliances will translate to lower revenue for suppliers overall, even if the alliances enhance volumes for some suppliers,” the firm said in a research note.
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“We expect suppliers will look to recover lost profits by extracting better terms from smaller customers.
“In the UK grocery segment for example, Ocado and Iceland are among those that could come under pressure from suppliers here.”
Tesco’s deal with Carrefour aims to increase their leverage with suppliers and deliver a competition boost with the ability to cut prices even further, through strategic relationships with global suppliers and the joint purchasing of own-brand products and goods not for resale.
The alliance, announced last week, comes months after Tesco completed its £3.7 billion acquisition of wholesaler and convenience store operator Booker.
Meanwhile, Sainsbury’s £12 billion mega merger with Asda would create a supermarket titan with unprecedented buying power and topple Tesco from its long-term position as the UK’s biggest grocer in terms of market share.
Sainsbury’s and Asda have gone on record to say suppliers will bear the brunt of a pledge to bring down the price of everyday products following their merger, which is still pending approval from the Competitions and Market Authority.
Moody’s said Tesco’s deal with Carrefour was “credit positive”, citing increased bargaining power and purchasing efficiencies that would cut costs, improve the quality and choice of products, reduce prices, and therefore enhance their competitiveness.
“The Tesco and Carrefour deal is the first cross-channel alliance to come to our attention,” Moody’s stated.
“The rationale is sound because UK grocers have relationships with many of the same international suppliers as their continental peers.
“We believe that Tesco’s agreement with Carrefour will enhance its ability to maximise its price competitiveness with the merged Sainsbury’s-Asda as well as German discounters, Aldi and Lidl.”
The German grocers have both been gaining market share in the UK by undercutting the Big 4 grocers – Asda, Sainsbury’s, Morrisons and Tesco.
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