In a surprise announcement made last week, Tesco and Booker have announced that they are to merge in a multi-billion pound deal. This operation has significant implications for the grocery sector and in particular the convenience sector, and signals a new way of thinking from Tesco.

Why has Tesco decided to make a play for Booker and the wholesale market?

The simple justification for the merger is that the retail grocery market in the UK is growing slowly, at an estimated 1.5% in 2016. With increased competition from rival retailers and channels to market, Tesco’s opportunity for growth within this market is limited.

By merging with Booker, Tesco is opening itself up to a whole new market which it has dubbed the ‘out-of-home’ food market, which it estimates is worth around £85 billion. Trends in the market mean that the lines between retail and foodservice are blurring, with the convenience sector being a prime example.Tesco is not satisfied with half the pie, it wants to be the dominant food provider whether it is purchased in its own stores, independents, or through foodservice providers. As the largest grocery retailer within the UK, Tesco has strong buying power in the market. Add to this the largest cash and carry provider, and its buying power increases.

What could it mean for the convenience market?

Tesco plus Booker equals a dominant force in the sector, with more than double the market share of its nearest rival. The combined store estate under the group’s six fascias would total around 7,500, which represents more than its three nearest market share rivals – Co-op, Spar and Sainsbury’s Local – combined.

The new group’s dominance in both market share and store number terms will mean that there is likely to be significant scrutiny from the Competition and Markets Authority (CMA) around this deal. Tesco argues that as Booker simply serves stores under its banner, rather than own them outright, that competition will be maintained.

Does it make sense?

A trend in 2016, and now 2017, has been the larger grocery multiples looking for new ways to generate growth within their operations. Morrisons has turned supplier, partnering with Amazon and relaunching Safeway as a wholesale brand. Sainsbury’s acquired Argos and Habitat for the sum of £1.4 billion to develop its non-food offering and shift the group’s dependence away from its core business.

Now Tesco has shown its hand. With the deal valued at more than twice that of the Sainsbury’s/Argos deal, it is an ambitious one but also one with more direct synergies. The lines are blurring between grocery retail and foodservice and the combined buying power of Booker and Tesco will mean cost savings in a market where margins are likely to be stretched in the medium term due to the devaluation of Sterling.

Overall, it is hard not to be impressed by Tesco’s logic behind the deal and the bold manner it has gone about it. This is not the Tesco of three years ago that was struggling to keep its market share; this is Tesco on the attack, looking to gain share in completely new markets. This is also not simply an acquisition to add short term growth; this is an acquisition which lays the foundation for the Tesco of the future. It is now up to Dave Lewis, Charles Wilson and the rest of the combined teams to capitalise on its new vision of the future of grocery retailing.

Senior Retail Analyst at Mintel, Nick Carroll currently writes a range of UK & European retail reports and is regularly called upon to comment on breaking retail stories in the UK’s leading media. Prior to joining Mintel Nick worked for over eight years in retail for both Jones Bootmaker and Barratts.

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