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Not even two months after Sainsbury and Asda proposed a merger that could further consolidate an already concentrated UK grocery market, #1 Tesco today announced its intention to form a strategic alliance with France’s Carrefour, France’s #3 behind System A (Auchan/System U partnership) and Leclerc.

The aforementioned merger has understandably generated concern about how promised price cuts to benefit consumers can possibly be achieved without closing stores and/or making staff redundant. This is a real problem at a time when the UK retail sector is under extreme pressure, with high street shops closing every week, falling foul of online competition and high overheads.

The latter, however, should escape such scrutiny, focusing on a long-term strategic alliance (3yr operational framework) to cover global suppliers, joint purchasing of own brand products and goods not for sale. Each will continue to work with their own local and national suppliers – to appease any EU/domestic criticism no doubt – but will try to save more where they can in terms of more international procurement. This is essentially the pair bolstering their buying power to save money and protect margins.

The question now, in a similar vein to criticism of an SBRY-ASDA tie-up, is whether the consumer will actually benefit from efforts to buy more cheaply. Will prices fall? Will there be more choice? Will the product offering be more competitive?

The likelihood is that today’s announcement is focused more on protecting wafer thin margins than benefiting consumers, knowing that brand loyalty is strong. These are companies after all. And publicly listed. In which case fiduciary duty is to stakeholder/shareholders, rather than consumers.

The timing and geographical proximity of the parties involved, however, is not lost on us as the UK edges closer to what could prove a highly disruptive Brexit. It is highly likely that today’s news is fuelled by fears of what Brexit might do to cross-channel trade and finely tuned supply chains, especially in terms of perishables like fresh food.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Mike Van Dulken

Mike van Dulken

Accendo Markets’ Mike van Dulken has worked in the City since 2002, with some of the biggest names in the City. His career kicked off at Jefferies as an equity analyst before a 2007 move to Société Générale saw him help service hedge funds with short-term trade ideas during the financial crisis.

Head of Research at Accendo since 2010, covering shares, indices, commodities and FX, he is regularly quoted in the financial press. Accendo Markets has been voted Best CFD research Service by ADVFN in 2017 and 2018.

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