Teamwork Makes The Dream Work

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What's going on?

On Monday, the UKs biggest grocer, Tesco, and Europes biggest retailer, Carrefour, announced plans to combine their mammoth buying power and both companies stocks rose.

What does this mean?

Together, Tesco and Carrefour spend over $100 billion buying products to fill their shelves. By shopping together, theyll become an even bigger customer to their suppliers and plan to use their newfound size to negotiate lower costs on their own-brand products (e.g. cola rather than Coca-Cola or Pepsi). As each chain operates in a different market, they dont directly compete with each other (except in Poland) which puts them in a nice position to form a strategic alliance like this.



The companies could save up to $525 million a year in costs, which theyll probably pass on to their customers through lower prices.

Why should I care?

For markets: Grocers are teaming up.


This play is the latest in a series of similar moves in grocery land. Heavy discounters Aldi and Lidl have been spreading across Europe as well as expanding into the US, putting pressure on the big guys and winning over customers. The UKs second-largest supermarket, Sainsburys, agreed to buy the UKs third-largest supermarket, Asda (from its big American owner Walmart), earlier this year. And Amazon notoriously gobbled up Whole Foods last year.



The bigger picture: Is there such a thing as too cheap?

While cheaper may be better for your pocket right now, theres a fine line between healthy competition and an all-out price war which could result in lower profits for the entire industry. Companies like Amazon and Uber have deep pockets, so may be able to withstand periods of lower profits, but thats not necessarily true for the smaller players. While the Amazons and Ubers of the world can sit tight and lose money, the little guys risk running out of cash. After which, the survivors can raise their prices, but this time without the competition.

Originally posted as part of the Finimize daily email.

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