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Tesco, Carrefour sourcing partnership could help them compete in an Amazon era

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Tesco, Carrefour sourcing partnership could help them compete in an Amazon era

A sourcing partnership between Tesco PLC and Carrefour SA is unlikely to significantly cut costs at either company in the short term, but it could be the first move from European grocers threatened by Inc.

Some analysts said they do not see big savings in the immediate future for either of the two companies as a result of a plan to jointly negotiate with suppliers for their store-brand products. But the joint endeavor could be the first act in an attempt by European grocers to improve performance ahead of more expansion by Amazon on the continent, said Christopher Durham, president of My Private Brand, a consulting firm. The two retailers announced their tie-up July 2

"This is the first rumbling that the big guys are actually afraid of Amazon," Durham said in an interview with S&P Global Market Intelligence. He said the two retailers' move to join forces on sourcing could be a test for closer cooperation, up to a merger. Analysts have speculated about a deal between the two companies on and off for over a decade.

"They could be one company," Durham said. "If you go shop the stores, they look almost identical."

Neither Carrefour nor Tesco responded to S&P Global Market Intelligence's requests for comment.

A separate group of retailers, including French grocery operator Casino Guichard-Perrachon SA, also said July 2 that they would form their own purchasing group.

Amazon has been looking for partnerships with retailers in parts of Europe, especially France, since 2017. In October 2017, media reports suggested that the Seattle-based e-commerce giant approached several French grocery store operators, as well as retailer E. Leclerc SA, about distribution agreements and acquisitions.

In March, Amazon said it would deliver orders placed by customers in and near Paris through grocery chain Monoprix, owned by Casino, using its Prime Now service. At the time, analysts said the deal was likely an attempt by Casino to learn more about e-commerce, not a bet on improving financial results in the short-term.

Speaking July 2, analysts made similar comments about the short-term effects of a partnership between Tesco and Carrefour. Sanford C. Bernstein analyst Bruno Monteyne told S&P Global Market Intelligence that the joint negotiating approach could yield some lower costs associated with each chain's private-label products.

But the savings is unlikely to stand out in either company's financial results in the near future, he said. "In our view, it does materially move the needle, but [it's] not enough to open my excel model."

The grocers share multiple suppliers, according to S&P Capital IQ. These include U.K.-based Nomad Foods Ltd., a frozen and packaged foods manufacturer in Western Europe, and Belgium based-Ontex Group NV, which makes baby diapers, wet wipes and other personal care products.

Squeezing out additional profit by joining forces to negotiate with these suppliers will be difficult, said Durham, the consultant.

Both Tesco and Carrefour already have developed, profitable private-label brands, and the companies would need to dig deep into their suppliers' cost structures to make the brands more profitable. That could include scrutinizing the prices of raw ingredients that the manufacturers use, he said.

Even then, "you're talking basis points, maybe," Durham said.