What is driving the apparent scramble for distribution and wholesaling businesses in UK food?

So many people have asked me that question recently and, while there isn’t one simple answer, there are plenty of reasons which have come together at this particular moment to drive the trend. 

“The big four are fighting like cats in a bag for a bigger share of a market reduced by the growing chunk taken by the discounters”

Most fundamentally, food retail has been tightly regulated for many years and the old Competition Commission enforced a four major players doctrine that made it pretty well impossible for the sector to consolidate effectively. 

Tough planning controls, especially in the South East, made it difficult to expand organically in attractive locations.

So we ended up with four major groups who could be pretty competitive with each other on price, quality and value, but couldn’t easily acquire more than the occasional struggling grocer. 

Maybe that was a good thing for consumers and it certainly drove the creation of some world-class retail businesses.

Throughout my years in the industry, competition was tough and kept getting tougher. 

The unexpected rise of the discounters

What wasn’t in the equation was the possibility that the discount sector would burst out of what for many years was a niche position to become effectively a fifth big player in the market. 

“How do you hold your own in that scenario? Improve product, deliver better value to customers, control and reduce costs”

Don’t get me wrong, we watched them carefully. But their ability to expand organically in smaller secondary locations, chosen to maximise impact on existing portfolios of the big four, was hard to resist and their cost structure gave them a significant advantage. 

Now we have a position where the big four are not just fighting each other for market share, they are fighting like cats in a bag for a bigger share of a market reduced by the growing chunk taken by the discounters. 

How do you hold your own in that scenario? Just the same way you fight in any market. Improve product, deliver better value to customers, control and reduce costs – and above all keep doing it better. 

The margin recalibration that has happened over the past four years has changed retail and many are forecasting no significant upwards change over the coming years.

To stay competitive it’s unlikely the 6% plus margin of the grocers at their peak will return for a long time to come.

The current climate

So what has changed so recently? Quite a few things, starting with the Brexit vote and the sharp fall in sterling.

Prices are already rising after years when the economic background and competitive forces kept them flat or falling. 

All the forecasts point to continued food price inflation when we actually do leave the EU and the pressure of competition will make it harder to pass that back to the customer. Passing it back to the suppliers won’t be too easy either. 

“So now the search is on for bigger volumes to work with, in a new way”

Food retailers work collaboratively with suppliers all the time but everybody has streamlined ranges and improved value in recent years.

But you can’t do that forever because online is changing the customer wants – let’s face it, they want everything and at the lowest cost, best quality, in the fastest way, and why wouldn’t they?

So now the search is on for bigger volumes to work with, in a new way. Tesco seeks synergies and sourcing benefits by adding the wholesale and catering volumes handled by Booker. Sainsbury’s is believed to be looking at Nisa for presumably the same basic reason.

Anyone who has read the Competition and Market Authority’s preliminary comments on the Tesco-Booker deal will be aware that the regulators are struggling to get a grip on the complex competition issues involved. 

The ‘driving time to a competitor’ method of assessing acceptability of an acquisition will struggle to deal with the issues raised by the symbol groups, delivered wholesale and cash and carry. 

How they will tackle the potential conflicts of interest between a new owner and independent shopkeepers remains unclear.

Sounds a bit like a muddle created by an over-enthusiastic regulator over many years, and not unlike the two market model of convenience and large food retail. 

All this before Amazon gets going properly with another new delivery channel, which could make the success of discounters look like a picnic by comparison. But that’s a whole different topic for debate.