Woolworths strikes new deal to supply Tesco with DVDs

Woolworths, the general retailer, yesterday clinched a new deal to supply CDs, DVDs and computer games to Tesco - but on the supermarket giant's terms.

Chris Rogers, Woolworths' finance director, said the group hoped to boost the volume of entertainment products it supplied Tesco to compensate for the supermarket group paying less for each item.

"There has been an improvement in the terms for Tesco, as in any situation where someone is growing their business very quickly, but hopefully by working closely together we can benefit both businesses," Mr Rogers said.

The retailers have pledged to work together in a "more collaborative way to improve the efficiency of the entertainment supply chain", Woolworths added. Shares in the pick 'n' mix retailer rose a ha'penny to 42.75p, reflecting the City's relief that Tesco had opted to renew the contract.

The new agreement runs until February 2007, although a loophole would allow Tesco to sever its ties next August if Woolworths' Entertainment Wholesale (EUK) subsidiary fails to keep to its side of the bargain. Mr Rogers said there was scope to reduce the amount of Tesco's working capital tied up in home entertainment, improve systems and help Tesco to display its DVDs in-store better.

Sales of DVDs at Tesco have exploded in recent months, reflecting the group's determination to increase its share of the overall UK retail market. It already takes £1 in every £8 spent on British high streets. The supermarket chain, which does not split out its non-food sales, revealed that sales of its home entertainment products shot up 30 per cent over Christmas, with DVD sales soaring almost 50 per cent.

Mr Rogers said the group's EUK subsidiary would "look at doing business with other retailers", noting that although it supplies Safeway, it does not supply Wm Morrison. Neither does it supply J Sainsbury, nor Asda, he added.

Rory Codd, at Numis Securities, said: "The announcement will come as a relief to shareholders." He estimated the old contract was worth about £10m to Woolworths, or 11 per cent of annual profits.