What Tesco’s Booker buy means for every business owner
Tesco stunned the grocery sector with its £3.7bn acquisition of the UK’s largest food wholesaler Booker PLC last week. Interestingly, the supermarket giant’s sudden appearance as an acquirer follows an 18-month disposal programme of non-core businesses, and the deal itself offers useful lessons for those looking to sell a business.
It’s been a fascinating journey for Tesco. Its 20-year dominance of UK food retail – where it still has 30% market share – was eroded when Aldi and Lidl arrived in the UK to offer lower prices and smaller format stores.
Faced with flat sales and lower margins in its core sector, Tesco diversified into restaurants, garden centres, convenience stores, and coffee shops among other segments. In 2015, new chief executive Dave Lewis took over in the wake of an accounting scandal. Writing to his 140,000 employees at the time, he said “we are going to do the right thing every day, every week, every month and rebuild the business”.
Adapting to a changing market
In tandem, Tesco is being driven by a change in customer habits. The eating out market is growing at 5% a year – faster than spending on eating at home, in addition many consumers no longer do a weekly food shop in an out of town supermarket, but prefer daily top-ups.
The Booker deal addresses much of this. Booker supplies leading UK restaurant chains including Wagamama, Rick Stein and Carluccios, along with 120,000 other retailers and 700,000 small businesses. Most importantly for an acquirer with a dominant market share, the deal adds just 2% to Tesco’s share of the UK grocery market.
Of course it remains to be seen whether the deal gets through various competition concerns, but having perhaps learnt the hard way, few would deny that Tesco has refocused with a clear sense of purpose.
Lessons for business owners
So what are the key takeaways for business owners when faced with major changes to the fundamentals of the markets they serve?
- When you notice changes in customer behaviour, it’s important to distinguish between trends and habits to understand how your market has changed. Is the change a blip, or is it another sign of lasting change? Tesco has worked out that the best way to serve the restaurant trade is not to compete with a small part of it – it sold its Giraffe chain last year – but to supply most of it with the Booker acquisition.
- Few would have guessed that Booker would sell to someone in another segment of the industry, but BCMS clients are more likely to be acquired by someone outside their core business than another competitor. Booker’s business delivers profit margins of 2.75% - not much by some standards, but higher than the supermarket sector’s current 1%. Further proof that it’s critical to understand buyer motives before entering discussions.
- Expect more deals across the food sector because of this. The immediate knock-on is likely to be on property disposals to satisfy local competition concerns. Further on, expect more acquisitions of SMEs in transport, manufacturing, and retail, as competitors and suppliers react to Tesco’s move for Booker.