Opinion: Tesco, Carrefour alliance may not provide results in produce as predicted

July 20 , 2018

This column originally appeared as Jim Prevor’s regular Fruits of Thought column in the July 2018 edition of sister publication Produce Business magazine.  

In Europe‭, ‬the entire food industry has reacted with concern to a joint announcement between France-based Carrefour‭, ‬generally ranked as the second largest retailer of food in the world‭, ‬and U.K‭.-‬based Tesco‭, ‬generally ranked as the sixth largest retailer of food in the world‭, ‬that the companies intend to consolidate some procurement‭.‬

The agreement has not been finalized and the degree to which it will impact perishables is unclear‭. ‬The press release only mentions that‭ ‬‮…‬‭ ‬“The Alliance will cover the strategic relationship with global suppliers‭, ‬the joint purchasing of own brand products and goods not for resale‭.‬”‭ ‬

So‭, ‬at least initially‭, ‬they may approach big banana companies that sell globally‭, ‬but not a U.K‭. ‬cabbage grower who only sells‭ ‬domestically‭. ‬A lot of the produce industry is in between these extremes‭. ‬Exporters in the Southern Hemisphere‭, ‬for example‭, ‬market globally‭, ‬often from one source of supply‭. ‬So which companies are included will be revealed in time and‭, ‬probably‭, ‬will shift over time as the retailers learn what works and what doesn’t‭.‬

There is some real question as to why these massive retailers would think this is a wise course‭. ‬Fortunately‭, ‬we have a clear explanation‭. ‬Dave Lewis‭, ‬Tesco Group’s chief executive‭, ‬said‭:‬

“I’m delighted to be entering into a strategic alliance with Carrefour‭. ‬By working together and making the most of our collective product expertise and sourcing capability‭, ‬we will be able to serve our customers even better‭, ‬further improving choice‭, ‬quality‭ ‬and value‭.‬”

So‭, ‬there you have it‭: ‬choice‭, ‬quality and value‭.‬

Well‭, ‬we will leave the rest of the store to others‭, ‬but‭, ‬in produce at least‭, ‬it is unlikely that consolidating buying will result in improvements in any of this‭.‬

The argument usually made is big buyers can leverage this buying power against vendors and thus elicit the best prices‭, ‬the best‭ ‬product and the best assortment‭.‬

Some of this defies mathematics‭. ‬If we want to take U.S‭. ‬retailers and claim Walmart‭, ‬Kroger‭, ‬Safeway‭, ‬Costco‭, ‬Ahold-Delhaize‭, ‬Albertsons‭, ‬Publix‭, ‬H-E-B‭, ‬Whole Foods and Meijer‭ ‬‮–‬‭ ‬the Top 10‭ ‬U.S‭. ‬food retailers‭ ‬‮–‬‭ ‬are throwing their weight around and getting‭ ‬vendors to sell them well under the market‭, ‬we really are not making any sense‭. ‬Those 10‭ ‬retailers account for about 60‭ ‬percent‭ ‬of all retail food sales‭, ‬so‭, ‬they can’t be buying under the market‭. ‬They ARE the market‭.‬

The truth is simply getting bigger typically leads to paying more‭, ‬not less‭. ‬First‭, ‬the requirement for large volumes restrains‭ ‬the vendors one can deal with‭. ‬Generally speaking‭, ‬having more vendors competing for one’s business is likely to produce more competitive pricing‭.‬

The other issue is sustaining a viable supply chain‭. ‬In the end‭, ‬all the expenses incurred by producers have to be paid for‭ ‬‮—‬‭ ‬maybe not every year‭, ‬but‭, ‬over time‭ ‬‮—‬‭ ‬or the vendors will disappear‭. ‬Certainly‭, ‬it will be difficult to raise money to expand and‭ ‬sustain operations‭. ‬Now a little guy can sneak through‭. ‬A vendor long on a load can take a loss‭. ‬But when one becomes really big‭, ‬that buyer has to keep its vendors in business‭. ‬That is why Walmart has long placed maximums on the percentage of a vendors’‭ ‬business it wants to account for‭. ‬

What about quality‭? ‬Surely as a giant‭, ‬one can demand the best‭. ‬Actually‭, ‬no‭ ‬‮…‬‭ ‬in the old days when all retailers would go to wholesale markets such as the Covent Garden in London‭, ‬Rungis in Paris or the old Washington Street Market in New York‭, ‬these retail buyers would literally inspect each lot‭, ‬looking for the most extraordinary apple‭.‬

But at some point‭, ‬when a retailer reaches a certain size‭, ‬it is buying FOB and pretty much all it can do is order at the top grade‭. ‬There is no ability to identify better quality on a scale that would be meaningful‭.‬

Of course‭, ‬a retailer can elect to buy incredible new varieties‭, ‬top brands‭, ‬etc‭., ‬but these producers either don’t have sufficient volumes to supply monoliths or they don’t want all their eggs in one basket‭.‬

Well‭, ‬what about choice‭? ‬Surely the big buyers get the respect‭, ‬and so they get the product when it is scarce and can better serve their customers‭.‬

That seems logical‭, ‬but is not how the world works‭. ‬Imagine a producer who sells 70‭ ‬percent of his crop to a behemoth‭, ‬maybe Walmart or this new Tesco/Carrefour alliance‭. ‬Then there is a weather event‭, ‬and 60‭ ‬percent of the crop is lost‭. ‬Will the producer‭ ‬cut everyone 60‭ ‬percent‭, ‬or will the producer abandon his smaller customers to protect his biggest one‭? ‬

Typically‭, ‬noting the producer will have to disappoint the biggest customer substantially‭, ‬and betting that big guy will not love the vendor appreciably more because he ships 21‭ ‬percent of the requested volume rather than 19‭ ‬percent of the volume‭, ‬what vendors tend to do is supply the smaller guys as completely as possible‭. ‬This way‭, ‬they are heroes to the smaller retailers and can‭ ‬call in a favor when needed‭.‬

There may be reasons for this deal that no one is admitting‭. ‬Tesco had its global ambitions denied when it failed in both the United States and China‭. ‬Carrefour is mostly complementary in terms of store locations‭, ‬operating in few places where Tesco does‭. ‬Could this be a date that one hopes will lead to marriage‭? ‬Maybe‭. ‬

One other problem with consolidating procurement is it leads to buying the wrong stuff‭. ‬It focuses attention on driving costs out of a supply chain‭, ‬rather than delighting customers‭. ‬

Perhaps decentralizing procurement is the answer‭. ‬Letting retailers buy for a specific locale and demographic would be more likely to lead to stores stocked with on-target products and‭, ‬perhaps‭, ‬even give retailers a chance to buy better quality at a lower‭ ‬price‭.  ‬

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  1. Nada Day says:

    If the fresh produce don’t have a freshstart just don’t buy it. You health and safety is too important to leave food safety to amateurs.