Moody's Investors Service has said that the recently-announced purchasing tie-up between Tesco and Carrefour is credit positive for both retailers, however the deal is likely to impact suppliers' bottom line.
"The alliance is credit positive for both retailers because the increased bargaining power and purchasing efficiencies will reduce their costs," said David Beadle, vice president – senior credit officer at Moody's.
"The retailers expect the alliance will enable them to improve the quality and choice of products and reduce prices, enhancing their competitiveness."
A New Trend
In a briefing note, Moody's said that the purchasing alliance is the latest in a series of buying agreements between major European grocers, being announced on the same day that Casino, Metro, Auchan Holding and Schiever announced a similar partnership.
'We expect alliances across the retail industry to remain a trend,' Moody's said.
On the Tesco-Carrefour alliance, Moody's said that the rationale behind the agreement is 'sound', given that UK retailers have relationships with many of the same international suppliers as their continental peers.
"Moreover, Sainsbury’s and Asda’s planned merger announced at the end of April highlights the significant opportunities retailers believe will reduce costs by combining their buying power," said Beadle.
"Unlike the Sainsbury’s-Asda deal, competition approvals are not necessary for buying alliances and we believe execution challenges are modest. Consequently, we believe that Tesco’s agreement with Carrefour will enhance its ability to maximise its price competiveness with the merged Sainsbury’s-Asda as well as German discounters, Aldi and Lidl."
Supplier Impact
Moody's said that the growing number of retailer alliances is 'credit negative' for suppliers and smaller retailers, because "lower purchasing costs for the retail alliances will translate to lower revenue for suppliers overall, even if the alliances enhance volumes for some suppliers," Beadle noted.
Moody's expects suppliers will look to recover lost profits by extracting better terms from small- to medium-sized players.
"In the UK grocery segment for example, Ocado Group plc and Iceland are among those that could come under pressure from suppliers here," said Beadle.
On 28 June, Moody's changed its rating outlook on Tesco to positive from stable.
'The rating outlook change reflects our expectation that positive momentum in the company’s operational performance and credit metrics will be sustained, despite the ongoing challenges in the competitive environment and more broadly in the UK economy,' Moody's said in a statement.
© 2018 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine
