It was just 10 months ago that Tesco’s £3.7bn swoop for wholesale giant Booker sent shockwaves coursing through the grocery industry.

“One of the corporate surprises of the retail century so far” was how Shore Capital head of research Clive Black described the deal when it was unveiled to the market back in January.

Investec’s Gary Hobbs echoed those sentiments, summing the merger up as “a surprising move”, while “extremely bold” was the verdict of Retail Vision’s John Ibbotson.

How the sector has changed since that frenetic Friday in January.

In that brief time, the seismic tremor sparked by Tesco and Booker has created further waves of change in the grocery market.

Morrisons, increasingly looking to leverage its vertically integrated model under the leadership of David Potts and Trevor Strain, has penned a “groundbreaking” deal to supply McColl’s 1,300 convenience stores and 350 newsagents. 

And Morrisons also surprised the industry when it struck a supply deal with online Goliath Amazon in February.

The retailer said at the time that it represented an “opportunity to build a broader business that complements our supermarkets” and that “wholesale supply enables this by growing volumes and leveraging our manufacturing, distribution and wholesale capabilities”.

“Because the grocery market has gone through so much change in the past five years, it could be suggested that other retailers were caught napping a bit”

Andy Clarke, former Asda boss

Sainsbury’s seriously considered acquiring Nisa, only to pull out of exclusive talks amid competition concerns, leaving the path clear for the Co-op to agree terms on a £137.5m purchase.

And the mutual moved quickly this week to fill the void left by Palmer & Harvey’s collapse, striking a deal to supply Costcutter’s 2,200 convenience stores.

Strategic steps

The rationale behind the retailers’ strategic steps is threefold, according to Clive Black.

“The overall retail landscape is relatively mature – there isn’t the growth to go for that there was over the last 30 to 40 years,” he observes.

“The big supermarket groups have become much more conservative with their capital and are sweating existing assets rather than putting new space down.

“And thirdly, there is an opportunity to gain synergistic benefits by putting volume through their existing supply chains without a huge amount of expenditure.”

Lazarus Research partner Mike Dennis believes that for c-store players such as the Co-op, there is another strategic imperative at play.

“The Co-op has gone through quite a few phases of regenerating its business and has lost quite a bit of share either through selling larger stores or through changes in the way it operates,” Dennis explains.

“By consolidating, it can rebuild its volume to regain some terms with its suppliers.

“They have to start thinking about how they are going to differentiate themselves within its competitor base – there is a need to try and find the best own-label product in the market to differentiate them from the Sainsbury’s and Tesco’s of this world.”

With such clear benefits potentially to be had, further consolidation of the food retail and wholesale markets is surely on the cards in 2018 and beyond.

Former Asda boss Andy Clarke certainly believes the markets are ripe for more amalgamation.

“Tesco is the first to step into this arena and to have access to a wholesaler’s business-to-business market,” he says.

“How much more consolidation could there be of food retailers and wholesalers?”

“Because the grocery market has gone through so much change in the past five years, it could be suggested that other retailers were caught napping a bit.

“It’s generated a furore of activity with others thinking ‘what do we do then?’

“In a market that is changing as much as this one has, you have got to suggest there will be a continued focus on consolidation to either increase market share or improve a declining level of profitability.”

Key decisions

Retailers such as Tesco, Morrisons and the Co-op making a play for the wholesale and foodservice space are now faced with the dilemma Clarke alludes to.

Do they pass on any cost savings achieved through their greater buying power to consumers in the form of lower prices at the shelf edge, therefore boosting sales?

Or do they leverage their newfound purchasing scale to beef up profit margins?

It represents an attractive choice for retailers to have to make, particularly in a category that has seen both customer loyalty and margins decimated by the onslaught of the discounters, the growth of c-stores and the shift to online shopping throughout the past decade.

For that reason, grocers such as Sainsbury’s and Asda are almost certain to be running their slide-rules over potential merger and acquisition targets in wholesale.

But how much more consolidation could there be of food retailers and wholesalers?

“Tesco-Booker has moved the goalposts,” Black asserts.

“Before the Tesco-Booker deal announcement from the CMA [Competition and Markets Authority], I would have said a modest amount. But that decision by the CMA opens up a much broader potential play.

“Sainsbury’s looked at Nisa, was probably scared by the CMA, but might wish it had seen it through.

“When the CMA says Britain’s biggest grocer and Britain’s biggest wholesaler can merge without any remedies whatsoever, it kind of opens the door.”

However, Bernstein senior research associate Tom Wharram warns: “Consolidation has a limit.

“Are there any more obvious deals out there? I can’t think of any, but I’m sure there will be opportunities.

“The fact that we’ve seen three major things this year – Booker, Nisa and Palmer & Harvey – suggest there is a reasonable amount of pressure in the wholesale space to forge partnerships with retailers in order to increase scale.”

“Clearly, Palmer & Harvey has been in difficulties for some time, but I wouldn’t read across form that to the rest of the industry”

Clive Black, Shore Capital

Against such a turbulent backdrop, could traditional retailers eventually wrestle total control of the food wholesale sector?

Black suggests not.

“In terms of Bestway, Landmark and rest of them, there is definitely still a role for well-run, independent wholesalers,” he argues.

“If you go into the Asian markets, there are specialists in that area that still have a real reason for being, and in London, which is a bit different from the rest of the UK, it is still a very fragmented supply chain.

“Clearly, Palmer & Harvey has been in difficulties for some time, but I wouldn’t read across from that to the rest of the industry. Good companies will always have a role.”

Clarke, however, believes things are “not looking rosy” for wholesalers – particularly with the might of an enlarged Tesco-Booker business on the horizon – and reckons food markets that have historically been seen as distinct sectors are slowly converging into one.

“In the past we would have always believed that there were multiple markets – wholesaling, catering, supermarkets, convenience, online, they are all distinct markets.

“What’s becoming clearer now is that the customer is not really interested in what the multiple markets are. They just want to be able to gain access to whichever channel they want to shop through.

“We are moving towards a place where there is just one big market and it’s made up of all of those components that may have been separated in the past,” Clarke adds.

“The fact that the CMA have, so far, not been prepared to challenge that is fuelling a stronger desire for consolidation, not just across the same sector, but between supermarkets, wholesale and catering.

“At what point will suppliers become a consolidated vehicle for retailers? Why couldn’t that happen? It’s all pointing towards a single view of the market rather than a format-led position.”

Should such a prophecy be fulfilled, the aftershocks of Tesco’s Booker acquisition could reverberate across retail and wholesale for years to come, further blurring the lines between retail, wholesale and foodservice.