Jim Armitage: Tesco-Carrefour alliance puts pressure on goods makers’ prices

Tesco has done much to improve its relationships with suppliers since the bad old days. Price gouging, forced rebates and bully-boy negotiating have been on the wane since the scandal-struck early 2010s.

Last week’s annual survey of suppliers from the Groceries Code Adjudicator showed 36% saying Tesco was a better business to deal with. That was on top of the 54% the previous year, making it the most improved supermarket in the UK.

With that in mind, fears that today’s alliance with Carrefour will result in a return to the bad old days for suppliers seem overdone.

However, there’s no doubt having another two mega-buyers coming together so soon after Tesco’s Booker deal and the Asda-Sainsbury’s tie-up will put serious pressure on goods makers’ prices.

Supermarkets are clearly trying to force a structural shift in the food industry, where big suppliers hand over more of their profit to them. As Sainsbury’s Mike Coupe says of his suppliers’ margins: why should they make 10% while we only make 2%?

The grocery giants will tell you that this transfer of margin has to happen so they can compete with Amazon when it launches its inevitable assault on European food.

I’m not entirely convinced by how real the Amazon bogeyman is. Jeff Bezos is super-cautious about which markets he enters. As he’s discovered with groceries and cheap fashion, the supermarkets game — particularly in chilled and fresh food — is far trickier than distributing online content and household goods.

For me, more of an issue is the way Aldi and Lidl have shown how inefficient the established players are. Their super-lean machines continue to heap almost unbearable pressure on traditional European retailers. That’s what’s really behind their moves to drive out costs, integrate supply chains and boost their buying power.

From Sainsbury’s to Tesco, from Carrefour to Auchan, at a time when consumer spending is at a standstill, further mergers and alliances of the giant store chains are inevitable.

How can suppliers respond to these new buyers’ clubs?

The answer lies in the fact that today’s Tesco deal is focused on driving better deals from own-label suppliers.

These are the manufacturers who will find it hardest to fight back: after all, if they won’t drop the cost of their unbranded bath foam, Tesco-Carrefour will just go somewhere else. It’s hard to see a way out for these unfortunates; they’ll have to accept whatever price the grocers offer.

Brand owners can fight the squeeze, but only if they invest ever more on developing better, more-exclusive products. They must reverse the current slowdown in marketing spend, and create a bigger buzz around their brands. That way, they’ll make customers demand their shops sell them, whatever it does to the retailer’s margin.

Consumer goods giants: the retailers are coming for you. Time to step up your fortifications.