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Tesco forms purchasing alliance with Carrefour to cut costs

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Tesco Plc is forming a purchasing alliance with French retailer Carrefour SA to increase its leverage with suppliers in a consolidating and price-squeezed supermarket business.

Geneva

TESCO Plc is forming a purchasing alliance with French retailer Carrefour SA to increase its leverage with suppliers in a consolidating and price-squeezed supermarket business.

The alliance between two of Europe's largest retailers, with combined annual sales of about US$171 billion, will manage purchasing for branded goods and private-label items, the companies said in a joint statement on Monday.

They said that they expect to conclude the agreement within the next two months, and it would last for three years.

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"It's a defensive move," Bloom-berg Intelligence analyst Charles Allen said. "There is little growth in the UK or France, so Tesco and Carrefour are trying to eke out every bit of saving they can."

European supermarket operators have engaged in a flurry of acquisitions and alliances in an effort to reduce supply costs.

In the UK, grocer J Sainsbury Plc plans to buy Walmart Inc's Asda, while France's Auchan Retail International SA, Casino Guichard-Perrachon SA and Schiever Group said last week that they would combine forces with Germany's Metro AG in purchasing.

That adds to deflationary pressures that food producers such as Nestle SA and Unilever are facing, as UK grocers wrestle with the added effect of a weak pound stemming from the vote to leave the European Union.

"Purchasing alliances are becoming theme du jour in food retail. However, the buying synergies for cross-national deals in food retail have been very difficult to realise historically," Berenberg analyst Dusan Milosavl-jevic said, citing the French partnerships between Auchan and cooperative Systeme U, Carrefour and retailer Cora, and Casino and the Intermarche chain.

Tesco bought wholesaler Booker Group Plc, which supplies thousands of convenience stores, in March.

Under Sainsbury's US$10 billion bid for Asda, Walmart will keep a significant minority stake, allowing the UK grocer to harness the American retail giant's purchasing strength in an effort to trim prices on essential items by 10 per cent.

Under chief executive officer Alexandre Bompard, who took over last summer, Carrefour has moved to beef up its e-commerce operations and to reduce the company's dependence on suburban big-box stores.

Competition in France has been heating up, with Casino in March announcing a deal to sell products from its Monoprix stores via Amazon.com Inc's Prime service in the Paris area, following a deal last year between Casino and grocery e-commerce technology provider Ocado Group Plc.

Tesco is targeting an operating margin of between 3.5 per cent and 4 per cent by 2020, up from 3 per cent.

The company is in the process of rebranding all of its 10,000 own-label products and cut prices on meat, fruit and vegetables this year.

Tesco and Carrefour said their alliance will let the companies improve the supply of goods available in stores. The agreement will also cover purchasing of goods not intended for resale, the companies said. BLOOMBERG