France's Carrefour and Britain's Tesco, Europe's two largest supermarket groups, plan to form a global purchasing alliance to cut costs in the face of competitive pressure.
The deal is the latest partnership in a European retail industry into which U.S. internet giant Amazon has made inroads in recent months.
"This strategic alliance between Carrefour and Tesco is a major agreement as it combines the purchasing expertise of two world leaders, complementary in their geographies, with common strategies," said Carrefour CEO Alexandre Bompard.
The alliance will cover strategic relations with global suppliers in areas such as marketing services or data collection as well as the joint purchasing of own-brand products and goods used in their own businesses, Carrefour said.
The alliance, which will be formally agreed upon in the next two months, will exclude fresh food products, while each company will continue to work with supplier partners at a local and national level. Financial terms of the alliance were not disclosed.
Improving Choice, Quality & Value
Tesco, Britain's biggest supermarket with sales of £51 billion ($67.2 billion), has been rebuilt by chief executive Dave Lewis after a 2014 accounting scandal compounded a sharp downturn in trading.
As part of that recovery the group, which has operations in eastern Europe and Malaysia and Thailand, has improved its relations with suppliers while raising pressure on its domestic rivals with price cuts.
"By working together and making the most of our collective product expertise and sourcing capability, we will be able to serve our customers even better, further improving choice, quality and value," said Tesco CEO Lewis.
Tesco faces a threat to its market leadership in Britain from plans by second-ranked Sainsbury's to buy Wal-Mart owned Asda, the number three player.
Carrefour, Europe's biggest retailer, makes the bulk of its €88 billion ($102.5 billion) worth of sales in Europe, while Brazil is its second-largest market after France. The deal with Tesco excludes China and Poland.
In April it gave a cautious outlook for this year after sales growth slowed in the first three months, with continued weakness in its core French market suggesting that the supermarket chain faces a long road to recovery.
Deals In European Sector
Shares in both Carrefour and Tesco made only modest gains, with European stock markets under pressure.
"At this early stage, we would guess total savings of £400 million/€450 million could be the initial ambition" Jefferies analysts said.
They also noted that the deal "may also lead to some speculating whether it is the precursor of a return to cross-border M&A in the space."
In January, Carrefour announced plans to cut costs and jobs, boost e-commerce investment and seek a partnership in China, in an effort to lift profit and revenue and beat domestic rivals in the race to develop digital shopping products.
Carrefour announced earlier this year a five-year purchasing alliance with French supermarket firm Systeme-U to make Carrefour the biggest buyer in its competitive home market.
Competition in France has been fierce, with smaller rival Casino's Monoprix chain in March becoming the first local retailer to sell groceries via Amazon in the Paris area. This followed a deal last year between Casino and grocery e-commerce technology provider Ocado Group Plc.
Recent deals in the retail sector have seen Auchan Retail, Casino, Metro and Schiever unveil a purchasing partnership while in March Tesco-bought Booker, creating a new powerhouse in Britain's £200 billion-a-year food market.
"An entente cordiale between the two giants of British and French retailing is yet another sign that squeezing the cost base is the biggest priority for supermarkets as they seek to contain the discounters and protect margins," said Neil Wilson, Chief Market Analyst for Markets.Com.
"Meanwhile every retailer is looking over their shoulder at Amazon and the potential disruption it could still cause in the grocery sector," he added.