The uncut interview with Tesco boss Dave Lewis and Booker CEO Charles Wilson

Q. You’ve just got one of the biggest mergers in the history of grocery retailing through the Competition & Markets Authority without a single remedy. You must be over the moon?

Dave Lewis (DL): These are preliminary findings but we take it as significant reassurance to the logic we started with. We always knew it would go through a process. It’s now gone through that process, in a really thorough way, and that’s validated where we were. And now we have to get on with it.

Q. You’ve said this deal will enable you to take on the Aldis and Amazons? How? You add £6bn to £52bn. It doesn’t sound a lot in the grand scheme of things. So there has to be something about this combination that achieves more than ordinary economies of scale. What is that?

Charles Wilson (CW): Tesco is doing well. And Booker is doing well. But put the two together and we’re expecting Tesco will grow faster; and Booker will grow faster. The two can achieve better growth together. And doing that we will be able to help our customers prosper at the same time. So we’re excited.

DL: You talk about scale in terms of transformation. We talk about transformation through capability. What’s unique is the combination of complementary capabilities. That’s much more significant than adding one sales number to another sales number. It allows us to compete in a way that’s different going forward.

Q. Unlike say the Poundland/99p Stores merger, you’ve persuaded the CMA to include the discounters in their thinking. How pivotal was that in the decision?

DL: I look at it like this. How could you possibly do a competition assessment and NOT include them? Quite rightly the CMA has included all significant competitors in a comprehensive analysis.

Q. Does the inclusion of the discounters signal a different approach towards competition in grocery retailing? One commentator has even suggested that in the wake of these findings that the big four could become the big three.

CW: Other retailers have to make their own case. You can’t read any more into it than that. The CMA have taken millions of lines of data, done loads of surveys, involving one heck of a lot of analysis of the grocery market. The CMA has then looked at all the evidence and said ‘is there a competition risk?’. And their preliminary findings – and they are preliminary – is that there is not. We’ve always seen [the merger] as pro competition. There’s a real opportunity to improve competitiveness for the benefit of the consumer, for our customers, for suppliers and for colleagues. It’s a win win.

Q. All the same, you’re going to be incredibly dominant, particularly in convenience, supplying not only 3,000 Tesco Express stores but Booker’s 5,000 symbol stores?

DL: The uniqueness of a retailer and wholesaler coming together has very specific features in the assessment of competition. We’ve been very clear. We see a massive opportunity in foodservice. That’s the principle driver of growth. And yet everyone goes back to the independent retail part of Charles’s business. But then what they do is treat it as an acquisition of stores. And it’s not. So when you test it through the theories of harm it doesn’t stack up, because Charles has no control over things like pricing at his symbol customers. So to say that a shop to shop acquisition suddenly becomes a different proposition isn’t logically sound. It’s that uniqueness most commentators have either chosen not to acknowledge, or haven’t understood.

Q. You sound disappointed at the coverage.

DL: Somebody needs to write a thought piece about the competitive process properly. One that talks about what the industrial strategy is in putting together these two businesses. That’s significant in the context of the UK economy. We talk about creating the UK’s number one food business, we talk about the foodservice opportunity, but everyone keeps coming back to the impact on independent retailers as the only commentary. We might just be missing the bigger picture here.

Our coming together has forced a number of people to reflect on their business in a way they probably haven’t for a while. And particularly in terms of channels. A number of people say ‘we look through this channel and we look through that channel. What this deal does is to say we respect the channel but we focus on the customer. And the fact is the customer is merging channels in the way they think about things. And we get ourselves to a place where absolutely we have the channel dedicated skills we need, but this makes us much more agile in terms of how the market might evolve going forward, and that’s the big opportunity. That’s the fundamental shift we see. It crosses the boundary of where people thought ‘they’re retailers, they’re wholesalers, they’re in completely different markets.’ No we’re not. We’re in the UK. We’re in food. We’re serving 60 million people who tend to eat their food in different places at different times but there are different ways of reaching them.

Q. I appreciate this is a watershed. But how on earth can wholesale rivals compete against your prices? And if they can’t, and they all go bust, what does that do for choice, price and service?

CW: When the competition authorities are looking at it they’re not looking at it through the prism of particular vested interests. The competition test is much more profound, and much more important. But let’s look at who we are competing with in wholesale. Costco’s market cap is $76bn. Bigger than Tesco and Booker put together. Sysco’s market cap is $22bn. Bigger than Booker Tesco put together. Amazon is $160bn. Bigger than Booker Tesco and coming into this space in a big way. There’s an awful lot of change. You’re seeing then people like Morrisons coming into the market. You’ve seen Nisa/Coop. So there’s change coming into the market regardless of Booker/Tesco. You are witnessing a change in the way the structure of the trade takes place. And the idea that people can say ‘you shouldn’t do this because my little business might find it a bit more difficult is not a particularly compelling argument when from a retailer or caterer point of view they need better choice, quality, price and service. They need a better supply from their partners. And your responsibility [as a wholesaler] should be to do a better job within wholesale for those constituencies, rather than hope that the government protects your little island.

Q. Through the EPOS data Booker collects, and through Clubcard data, you’ll have access to the prices independents sell their goods at. You can also see the markup they put on your wholesale prices. And cross correlate with prices for goods they sell elsewhere. That sounds like an incredible insight tool with which to compete against rivals. Does it not give you an unfair advantage?

CW: Of the 117,000 retailers we serve and the 440,000 catering businesses, we’ve got an EPOS link in terms of data with less than 500. But we tend not to use the data, because it’s not particularly robust. So the reason we offer free EPOS is to help our retailers, rather than it helping us. If you go to some other wholesalers it’s fair to say they are more vertically integrated in terms of their EPOS systems, because they ask for much more compliance. Whereas with Booker, we’ve reduced the spend threshholds. So that concern is a red herring. In terms of Clubcard, it’s a completely separate point. Further down the track, could the consumer redeem points, in coffee shops, or pubs, we would love to be able to offer that. Some of our customers already accept Clubcard points. We believe this is an opportunity to increase footfall.

Q. You’ve always said independents are free to leave if you don’t give them what they want. But how much notice will they have to give? What is the average length of contract, and what might it cost to buy yourself out?

CW: We’ve got symbol relationships with about 5000 retailers, but a lot have been out of contract for some time because we run a very loose model. When the CMA looked at it, they could see there were only 39 retailers with a more complicated relationship, so they realised there wasn’t an issue. Now, we manage those relationships very carefully. Some of them are very important to us. And they are fantastic businesses. I was with one on Saturday. He’s a Budgens retailer and he’s seen that under Booker he’s making money again. He’s excited that under Tesco we’ll be able to grow his business even faster and do an even better job.

DL: It’s important how Booker see the only way of keeping a customer is through the way they serve them. In all of my engagement with Charles and his team, the contract never comes up. I give huge credit to Charles and his team for growing their business through not relying on contracts as a way of constraining people and instead saying we’ve got to do a better job.

Q. What does all this mean for Tesco’s One Stop franchise operation? Will that be disbanded? Or put under the control of Booker?

CW: We operate symbols. We’re very happy with that. We’re privileged to work with some great Budgens, Londis and Premier customers. And a franchise operation is very different.

Q. Isn’t it semantics?

DL: It’s very tightly controlled in terms of compliance. Together will we understand convenience retailing and independent retailing better than we do? I’m sure we will. As I have put One Stop closer to the Tesco business in terms of how it buys have I seen how it can bring greater choice, value and [service] to Booker customers down the track? Yes I have. One Stop has benefited by being closer to Tesco. But will I tell you how we’re going to organise the business when this is done? No I won’t. And what I really don’t want is anyone speculating about things that are not on our mind. I’m really happy with One Stop. It’s a great business. And I do not want people fearing based on speculation. We’re really clear. This is about growth. There’s nothing in our synergies where we’re making people redundant in a material way.

I’m really happy with One Stop. It’s a great business

CW: What you saw when we bought Makro, and what you saw with Budgens/Londis, we took a best of both approach. One Stop have some really good forecasting tools, for example, which we think Budgens Londis retailers could benefit from.

Q. You’ve talked about a number of Tesco services that Booker customers could potentially avail themselves of, like banking and mobile phone services. But why would an independent want to be a collection point for a Tesco?

CW: Footfall. Everybody wants footfall. In some parts of the country I’ve got Premiers that are 300-800 sq ft store, and they’re up against a consumer who isn’t spending more money, while they face real cost inflation due to the rates, due to wages and other pressures. However, they are very well located. So if you can come up with the right mechanics, so you can say ‘hey, you will start to see people who you wouldn’t normally see in your shop,’ to get more real income into those businesses, that can be really attractive. It needs to be tested. It’s got to be profitable for them, and give them a real benefit. If you can save money on the cost of the last mile on delivery that’s helpful. If you can get additional income, through non-food, that’s helpful.

DL: This is not a new thing. Already independent customers are using their store as a place where people can collect parcels. Why are they doing that? A) there may be a fee associated with that. B) the traffic. The interesting thing is: does Tesco bring a new opportunity? We think it does. In our clothing and non-food offer around 80% of all orders are click & collect. At the minute it’s all in-store. So the question is could we create a network that is even closer to home? If that affords the retailer more footfall, or a fee, which they have with other delivery services, why wouldn’t they be interested?

Q. The other interesting point is that independents don’t seem to mind working with Amazon.

DL: The difference is that Amazon went to the independent retailers and said would you be interested? Tesco never did. No-one else ever did.

CW: In terms of benefits it’s important to look at this from one of our customers’s point of view. It starts with food. Can we improve the choice, price and quality of our food? Yes we can. Can we improve our fruit & veg? Yes. Can we improve our ready meals? Yes. Then you get in to the capabilities. We think Tesco has capabilities in fuel. Could be opportunities for our customers. They’ve got capabilities in finance. Insurance, banking, tap and pay. We think there’s some really nice developments that our customers can benefit from. There’s a lot of areas that, properly deployed, have got to work for the customer.

Q. There have been rumours that you will put Tesco brands into independent stores. You’re not going to do that are you?

DL: No. We will respect the branding in the marketplace. It’s idle speculation.

Q. What will happen to the Booker M&S contract? How much is it worth and will it be dead in the water after the Tesco deal?

CW: We’re very lucky. We’ve got a great relationship with M&S. We don’t comment on individual customers but I can’t see a reason why it won’t help them.

Q. Booker is part of a buying group. Will you be kicked out of that?

CW: AMS are good people and we’ve drawn real benefit from that over the years. We still see that we’re going to be playing a part in that for a time to come, but we need to put that into a wider Tesco conversation that’s not even on the table at the moment.

Q. Would Tesco ever consider being part of a buying group? There are some enormous retailers involved in them.

DL: At this moment, all the detail around what it would mean, how Charles buys, how we buy, is held in what’s called a clean team format. So whilst we know what the aggregate number is, neither of us see the detail. I would want to see the detail before making decisions at that level of detail. And you won’t get that [detail] until the deal is done.

Q. You’ve said that the biggest growth opportunity is on the foodservice side. Is this about taking on Brakes and Bidfood better on the delivered side?

CW: We serve 40,000 pubs, fast food restaurants and workplaces. Put them all together and it’s about 440,000 customers. Primarily these are independent. And the first [priority] is how we can do a better job for them. Our caterers would love us to do a better job on fruit & veg, for example. We think Tesco will stepchange that and really grow it. There’s also other services, the finance, the phones. What you can do on phones is just as relevant to an independent catering business as to an independent retailer.

Booker is good at food, Tesco is good at food. Put those two together and we can do some things people haven’t seen before

In terms of group accounts, we’re doing a good job, primarily served out of cash and carries, using click and collect. And then we’ve got the national chains. Aramark just renewed for five years, the largest foodservice operation on the planet, Carluccio is doing well, we’re pleased with Prezzo, Wagamama is growing nicely. We’re growing strongly on all three. We’ve got plus 8% on catering, group accounts up 20%, national chains 30%. Brakes and Bidfood are doing nothing like this sort of growth. It’s what I can do with Tesco that’s important. I’m really excited about what we can do on meal development, there’s a fresh opportunity, and better local delivery.

But we also see opportunities where Tesco is present in markets and Booker catering isn’t. You’ve got some large Tesco stores which could put a Booker catering offer in them. The great thing is Tesco is present in some markets where Booker isn’t. Some stores are trading out of their skins. Some aren’t.

DL: If you look geographically and you look at the customers in catering that Charles would like to serve, he’s got good proximity in some, and not so great in others. And in some of those regional markets there are Tesco Extras that have sufficient space. And in the same way we do with Arcadia and others we’ll take that space and offer customers something we don’t currently do.

Q. Will this concession be Booker branded or just an area in the store with bulk packs and catering equipment?

CW: It won’t be Booker branded. But you can see at least another 50 outlets that could be attractive in terms of a catering offer, which could also work for Tesco customers. It takes you closer to the market. That helps the caterer with proximity, and helps us grow at the same time. There’s also the delivery side. Tesco’s got 5300 delivery vans, Booker’s got 1300 vans. So you can start to offer delivery on fresh, meat, and use some of those Tesco vans when Tesco is not delivering them to the consumer. A lot of the bulky stuff we’ll still do on the Booker van. But it allows us be more responsive, to do instant delivery.

Q. It all sounds incredibly complicated. These two businesses that you insist will operate separately while somehow aligning?

CW:  It’s very simple.

DL: Conceptually, Charles tells us what the 1000 most important catering lines are. And I put them in the store. How we put them in the store is still to be determined, but it would be there for caterers if they wanted to shop there. And if that customer wanted to order it, we could deliver it using the same picking and the same delivery that’s already there. The fact it would go to a pub, rather than a house, the system is completely agnostic. So it’s not complicated at all operationally.

CW: The nice thing is when you’ve got space, vans, promixity, and a good ordering system, it’s actually cheap putting those things together. Caterers expect delivery at different times of the day but an awful lot are done between 5-7am. There aren’t many customers who want deliveries at that time.

DL: And a lot of Extra stores are still open 24 hours. But the bit that doesn’t work from midnight to 7am is the vans, they’re sitting there, so the opportunity is there to provide more hours of driving, on assets that are normally standing idle.

Q. What about suppliers? You’ve identified £100m of buying efficiencies. Aren’t you just driving down prices? How will you help them?

CW: Moving into the out of home market is important for the wider group but it also helps the suppliers. The catering demand window dovetails well in other ways. For example, we’re starting to sell a lot of turkeys because the office party season is peaking. And just as it peaks for Tesco it’s over for us. Similarly with carrots, from a supplier point of view, you can buy catering grade, manufacturing, wholesale and retailer grade, which builds a more efficient supply chain.

Q. You talk about buying whole fields of carrots. And yet you claim you’re not going to merge buying teams. How will you do that?

CW: If you look at Booker’s record on mergers, when Makro came in to Booker everyone expected us to close down Eccles, but actually they had capabilities we didn’t have, like fresh fish. And those buying teams are still doing a brilliant job. And Londis Budgens was the same. We’re interested in the result. The result is to give the customer a better choice , price and service. So rather than spending loads of time [on redundancies and closures] we said let’s go for the result. You can have people working in different locations quite comfortably when they know the end result is what it’s all about.

DL: It comes all the way back to the very first answer. It’s about complementarity of unique skills. We’ve not put any synergies around putting the two together in the business case. Why would either of us say these are complementary businesses and then crash the whole thing together? That would be completely the wrong thing to do and inconsistent with what we’ve said. There are some things Charles and his team buy that we don’t buy or touch or know or appreciate. What a pro kitchen wants from product performance. That’s a level of skill and capability in Charles’s team, not in mine. So we respect and retain. That will drive the growth. In certain areas like carrots, the opportunities is there in the future to present both markets to our supplier in a way we couldn’t before. Whereas in the past we bought a particular specification, we’ve increasingly tried to [flex] that, but with Booker’s customers we could go even further.

CW: For the suppliers it’s key. If you’re going to be competing in this industry in the next 10 years you cannot carry waste in the supply chain. Together you can build end to end solutions with no waste. It allows you to say ‘we can buy everything, utilise trucks and sheds all the way through the supply chain, there’s no wasted diesel, chill units are optimised, reducing refrigeration costs etc. That’s going to be absolutely brilliant.

Q. You’ve been quite conservative, about the growth opportunity. £25m sounds tiny.

DL: When you put together the 2.7 [merger prospectus] document, you have to make sure everything is independently audited. When it comes to growth, it’s notoriously hard to get an audited approach to growth that’s not yet been delivered. The City discounts it. The bit we put in was what we can very easily audit, which is about range. We’ve always said, we see a bigger opportunity, this deal is all about growth, but you can’t put that in the offer document.

Q. There are some well-known bears in the Stock Market towards the deal. What has been the response from shareholders overall to the merger? And if it’s a good why is the share price lower today than at the time of the deal?

DL: We’re at provisional findings level. So no-one is getting ahead of themselves. The shareholder base from a Tesco point of view is also diverse, and you’ve got to respect they bought at different times, with different aspirations and different theses for investment. As we have charted returning the core business to a 3.5 to 4% margin, we’ve said this merger is about growth. That’s not the investment thesis they have. They’re focused on the recovery. But for us it’s not the right way to run business, I have to put out what I think is right. If it clashes with their investment thesis I have to accept that. But we’re very comfortable with the discussions we have had with investors since the deal was announced, with only a very small minority voicing concerns.

CW: The other point to make is that, since Amazon and Whole Foods came together, supermarket stocks have been rebased around the world. But you saw the share price uplift when the merger got its preliminary approval so the important point is that the news has been met favourably.

Q. On the one hand there are people who say you’re paying too much. On the other hand, and particularly with Tesco’s share price a lot lower than at the time of the deal, there are people saying it’s not enough. Are you going to up the offer?

DL: As the saying goes, people’s point of view depends on their viewpoint. They have vested interests. You’ve always got to listen through that lens. What I would say is we were very careful for all stakeholders about how we termed the merger, in terms of the premium, the synergies and the opportunity to partake in future growth. Is it a good deal for Tesco and Booker shareholders? Yes. The challenge is to deliver the growth we’ve promised.

Q. You obviously spent a lot of time planning this move before you went to the market. You’ve now had another 11 months to think about it. How much more fully developed is your plan, or have you been waiting for the green light?

CW: Let’s take a step back. The biggest worry [in the past 11 months] was making absolutely sure we didn’t get distracted by the deal, and that we didn’t have to report that the two businesses were now going backwards. So I’m very pleased that it’s been business as usual. Booker had a very good half. And Tesco have been market beating. They’ve done a fantastic job. Credit to Alan, Dave and the rest of the team, the balance sheet has made real progress. In terms of how this moves forward we’re still very excited. Booker is good at food, Tesco is good at food. Put those two together and we can do some things people haven’t seen before. If anything we’re more confident. The food opportunities are there, the customers opportunities are there and that growth plan is looking really good for the future. Now it’s about making it work fast, and that’s where we’re heading.

DL: Thinking through this is one thing. We have to then go on and do it. What has been very clear with the teams working together is that the culture and values are the same. The only people who knew about the merger before [it was announced] were Charles and I. Since the deal was announced the teams have been able to selectively get [to know] each other better at a senior level. The CMA process almost forces you to do that. And seeing that [interaction and those shared values] gives me even more confidence that what it is we’re setting out to do stands a very good chance of succeeding.

CW: Tesco is the UK’s leading retailer. Booker is the UK’s leading wholesale. Put those two together you will have a leading British player that is able to compete with anybody internationally that comes our way. It’s a really exciting time. We knew when we were taking this on it was a big move but we are bang on track in terms of where we said we would be. And very excited.