The deal only covers the private label ranges of both retailers as well as goods not for resale, such as in-store lighting or shelving displays. Branded products will not be affected.
The deal is not yet inked but is expected to be formally agreed in the next two months.
The French and UK retail giants said the deal would mean better quality products, more variety and cheaper prices for shoppers. There are fears, however, suppliers and producers will be further squeezed by the collective buying power of the two giants that, between them, will control 8% of the Western European grocery market, according to Euromonitor International figures.
Tesco and Carrefour sought to calm these fears, saying the alliance would “create significant opportunities for suppliers” and that they would continue to source ingredients and products locally and nationally.
'A detrimental effect on the whole supply chain'
However, trade group FoodDrinkEurope said the deal, like other buying alliances, would have a detrimental effect on the whole supply chain by putting manufacturers and other producers under increasing price pressure.
FDE's director general Mella Frewen said: "This imbalance in bargaining power has led to many manifestly unfair commercial practices such as the transfer of excessive risks or unexpected costs from grocery retailers to suppliers.
“If the retailer de-lists products, manufacturers lose access to consumers – and likewise, consumers lose out on choice,” she added. "This alliance regroups the UK and the EU's largest players; on top of the recent Sainsbury and [Walmart-owned] ASDA alliance, this will have a huge impact on the balance of power along the food chain, to the detriment of all suppliers, regardless of size."
Neither Tesco nor Carrefour has given an indication of how much they could save in reduced sourcing costs.
'Far from a game-changer'
Bruno Monteyne, senior analyst for European food retail at Bernstein Research, however, told FoodNavigator that beyond some possible additional paperwork, most suppliers working with Tesco and Carrefour probably "won't notice" any difference.
"Joint buying on private label sounds great in theory but [...] there are already severally ‘buying groups’ in Europe," he added. "Managing private label buying through a third party intermediary is complex, time consuming and hard to get huge benefits from."
"The art of private label is to have very close relationship with your supplier, so you can jointly develop products over time that are perfectly suited for your customer base and brand position. Trying to combine two companies’ wishes into a relationship seems quite hard."
Consumer equity research analyst at Shore Capital Darren Shirley said the deal was “potentially positive but far from a ‘game-changer’”.
“We see the announcement as an interesting, and potentially positive move for Tesco, adding a combination of further scale and sourcing capability to an already market-leading position in the UK. However, we do not see the potential tie-up as a ‘game-changer’ and do wonder if a formal alliance of two national market leaders is enough to pique the interest of European regulators.”
Alexandre Bompard, who became Carrefour’s chairman and CEO in July 2017, described the strategic alliance as “a major agreement [that] combines the purchasing expertise of two world leaders, complementary in their geographies, with common strategies”.
Tesco CEO Dave Lewis said: "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.”
Philip Benton, research consultant at Euromonitor International said: “The strategic alliance between Tesco and Carrefour is a latest in a series of consolidation between the major grocery retailers in Western Europe.
"Tesco and Carrefour are equally worried with the purchasing power that German discounters Aldi and Lidl enjoy as the price race to the bottom continues and will likely accelerate when Amazon makes its play on food in Europe. Tesco are also concerned of the impact that Sainsbury’s acquisition of Asda could have on their own supply chain domestically so would have felt compelled to act quickly and decisively.”
According to Euromonitor International, the combined value sales of Tesco and Carrefour gives them a 8% share of the Western European grocery market, compared to Lidl’s owner Schwarz Beteilgungs' 6% and the Aldi Group's 5%. This 2% to 3% lead will provide the scale needed to aggressively price non-fresh food products, Benton said.
"Consolidation is the name of the game today," Monteyne said, adding that this could also occur by squeezing out smaller retailers.
Tesco, which reported group sales worth £49.9 billion (€65.5bn) in the 2016/17 financial year, may also see the deal as a way to safeguard the risk against possible supplier price rises in the event of a hard Brexit, Benton added.
Carrefour, meanwhile, is facing an increasingly competitive sector in its domestic market of France. A price war in recent years has been driving consumer prices downwards while its rivals Auchan Retail, Casino, Metro and Schiever have all announced their own purchasing partnership.
Carrefour, which employs more than 384,000 people worldwide and generated total sales of €103.7bn under its banners in 2016, said the deal was part of its Carrefour 2022 strategy, announced in January this year, which aims to increase growth, productivity and competitiveness.
In order to achieve cost reductions, it would be leveraging negotiations at an international level, rationalising indirect purchasing, cutting logistics costs and seeking purchasing and selling alliances.
There have been 2,400 redundancies since the beginning of the strategy.