It’s consolidation, but not as we know it…

Rolling boulder up hill

With Tesco, Sainsbury’s and Amazon all intent on growth through acquisition, what lies ahead for Scotland’s local retailers – and are we at risk of creating a two-tier industry of ‘haves’ and ‘have nots’?

by Antony Begley

For as long as SLR has been published – over 14 years now – we’ve been writing about industry consolidation. It usually comes in waves with the last major flurry seeing the likes of Aberness, Botterill’s and David Sands sold for very tidy sums and effectively wiping out the era of the independently-owned chain. Then the cash dried up and consolidation all but ground to a halt – but there’s a new wave starting to build and this time it’s bigger than ever, involving bigger sums than ever – and make no mistake, it will change the local retailing industry forever.

Tesco’s proposed merger with Booker, Sainsbury’s courting of Nisa and even online behemoth Amazon’s acquisition of Whole Foods will change everything. But what exactly will it mean for Scotland’s local retailers, those 5,000+ independently owned stores?

The two deals most likely to throw the market into turmoil will be Tesco’s merger with Booker and Sainsbury’s dalliance with Nisa, no doubt prompted by the Tesco bombshell that rocked the industry when it was revealed on January 27 and miraculously remained one of the best kept secrets in the history of the trade.

The Amazon deal is more of an interesting sideshow, not least because Whole Foods only has nine stores in the UK and just one in Scotland, in the somewhat unlikely location of Giffnock on the south side of Glasgow. Known affectionately in the US as “Whole Wallet” – because that’s what you end up spending when you visit one of their stores – it has been unkindly suggested that the only reason Amazon bought it was because billionaire boss Jeff Bezos’ wife likes to shop there. It’s a loss-making business but the real driving force behind Bezos’ deal is far more likely to be focused around owning some real-world bricks and mortar businesses, as well as the virtual ones that have made him so successful.

Bezos’ proven track record of taking a punt on leftfield diversifications is well known (Google Amazon Web Services as a good example, if you’ve never heard of it) and there’s no doubt his creativity and to all intents and purposes limitless budgets will undoubtedly be perceived as a clear and present threat for businesses trading more directly in competition with Whole Foods. But it would be a foolhardy local retailer who thinks there is little risk of Amazon ever getting involved in c-stores, not least because of its stunning foray into automated, largely staffless convenience retailing with its Amazon Go concept store in Seattle. Don’t forget too that Amazon already has a supply chain agreement with Morrisons for its online grocery shopping Amazon Fresh concept.

There has even been talk of Amazon seeking to “own the entire retail sector”. Hugh Fletcher, Global Head of Consultancy and Innovation at ecommerce consultancy Salmon said: “This deal is a clear signal of intent from Amazon to dive deeper into the grocery sector. Amazon Fresh and Amazon Go were the first steps, but this shows the ecommerce player is no longer treating grocery as just another branch in its huge ecosystem. There is no hiding the fact that Amazon is striving to own the entire retail sector.”

But it’s the Tesco and Sainsbury’s deals that are game changers, and those changes could come quickly, particularly as Booker has just petitioned the Competitions and Mergers Authority (CMA) to ‘fast track’ the merger.

This is not an unusual request and indeed there have been high profile fast-tracked deals in the past including the BT/EE and the Coral/Ladbrokes deals – so don’t be surprised if it’s pushed through in double quick time.

Booker can of course argue that it doesn’t actually own any of the Premier stores it supplies or, for that matter, the many other independents who buy from it on a daily basis, so the deal wouldn’t actually increase Tesco’s dominance of the food retail market in a direct sense.

Buoyed by the boldness of that deal, and many are already calling it the latest stroke of genius from Booker boss Charles Wilson, Sainsbury’s seems to want in on the act too, if for no other reason than to ensure it doesn’t lose ground on its great supermarket rival.

Nisa is, on the face of it, a good fit. Despite its recent return to modest profit, the business remains vulnerable and has only recently completed a £120m refinancing deal to help it steady the ship after the loss of both Costcutter and MyLocal supply contracts in a very short space of time.

Corporate finance specialists Cavendish went as far as to call the Sainsbury’s proposal “an entirely defensive acquisition”. Jonathan Buxton, Head of Retail at Cavendish, summed the entire scenario up nicely when he said: “Amazon’s acquisition of Wholefoods sent grocery stocks tumbling as the British grocery market becomes increasingly competitive, forcing profit margins and making independent retailers seek safety in scale. The [Sainsbury’s] deal is a reactive move following Tesco’s acquisition of Booker earlier this year, and sees Sainsbury’s adding another brand to its increasingly diverse portfolio, after its acquisition of Argos. The grocery market is undergoing a seismic shift and we can expect to see more acquisitions of this nature from the big four as they compete not only with each other, but also the tech giants who are encroaching on their markets.”

Bolt Learning Director and former HIM Managing Director Tom Fender has highlighted food to go and fresh as the two areas where the supermarket-led deals could carry a real threat for local retailers. He said: “Lots of customers love visiting their local independent store, that’s well documented, but the market is moving inexorably towards food to go and fresh – and that’s two areas where the likes of Tesco excel. It wouldn’t surprise me to see Booker customers, and in particular the Premier and Londis symbol stores in Scotland, benefitting from an outstanding supply chain in those areas.

“Both Tesco and Booker are also very interested in foodservice and I can envisage a situation where high quality, premium ingredients earmarked for restaurants and hotels could start finding their way into c-stores in the form of good deli offerings or just higher quality ingredients for those cooking from scratch.”

After years of venting fury and frustration at the encroachment of Tesco into the convenience market, many Premier, Londis and Nisa retailers are unsurprisingly upbeat about the prospect of having the might of a supermarket behind them. Walter Bryson, who owns a Londis forecourt in Prestwick said that the majority of Booker group retailers he has spoken to are “generally pretty comfortable” with the proposed merger.

“We understand that we’ll get better buying power, better promotions and better cost prices so I don’t think we would have too much to complain about,” he commented.

One area of concern he does highlight however is what happens when a store is near a Tesco or Tesco Express store. He explained: “I have a Tesco Express only a couple of hundred yards along from me and I’m not entirely sure what will happen on that front.”

As for Nisa retailers, while that deal is still at a much earlier stage, the sentiments are roughly the same. Mlinathort Nisa retailer Franck Casonato said: “To be honest we haven’t been told much at all so far about the deal. Everything I know I’ve read in the press, but if it delivers better prices and promotions and the chance of a bigger range, then it could be interesting – although we would be very keen to keep the same name above the door.”

Consolidation, it would appear, is being welcomed by those set to benefit from it – but what about the rest of the trade?

“The honest answer is that nobody really knows,” said Scottish Grocers’ Federation Chief Executive Pete Cheema. “What we do know is that these deals will have a big impact on a lot of businesses right throughout the supply chain. If Premier, Londis and Nisa retailers are all getting better pricing then their competitors will have no choice but to do what they can to match them – so there may be sustained pressure on wholesalers, particularly smaller independent ones. With many of them already operating off of margins as low as 0.6% or 1%, it’s hard to see how they’ll be able to accommodate this. And it certainly looks like it will be exceptionally difficult for local retailers that aren’t part of a symbol group, even if it isn’t one of the Tesco or Sainsbury’s owned ones.”

There are, of course, more questions than answers at this stage but it is clear as day that, just as it has had to do continuously over the last decade, the local retailing sector will have no choice but to up its game once more with competition likely to be tougher than it has ever been in the past.