Tesco’s £3.7bn merger with wholesaler Booker left many a retailer, analyst and journalist in a state of stunned silence this morning.

As jaws were recovered from desks and the logic behind the deal was unpicked, Shore Capital director Clive Black went so far as to describe it as “one of the corporate surprises of the retail century so far”.

But the more you look at the rationale behind the merger, particularly from a Tesco perspective, the less surprising it becomes.

The food market is evolving – and evolving rapidly. The way consumers eat is changing and the way people want their food served to them is becoming an area flush with innovation as the likes of Deliveroo and UberEats continue to grow their reach.

The three biggest areas of growth in that fast-moving landscape have been the rise of online grocery shopping, the boom in the convenience market and the surging number of coffee shops and restaurants.

By penning the Booker deal, Tesco has given itself a bigger grasp on two of those three burgeoning sectors.

Convenience

As time-pressed consumers use smaller shops, more often, convenience has grown exponentially.

According to IGD, the value of the convenience market is set to grow by £4.4bn during the next four years alone, taking its slice of the overall grocery pie to 21.3%.

But Tesco and its mainstream grocery rivals like Sainsbury’s have a relatively small foothold in a market dominated by independent operators.

Data from IGD Retail Analysis revealed that the multiples had 4,383 convenience stores at the end of March last year.

That compares to 15,060 c-stores operating under symbol groups, such as the Booker-owned Londis, Budgens and Premier fascias, and 19,000 unaffiliated independent retailers.

Booker itself supplies around 125,000 retail customers, from whom it raked in £3.05bn in sales in the year to March 25, 2016.

“The deal will make One Stop and Londis a more attractive proposition than competing symbol groups. The likes of Costcutter and Spar will be watching this quite nervously.”

Bryan Roberts, TCC

Just as Morrisons has done with moves to supply Amazon and resurrect the Safeway brand, Tesco has spotted room for revenue growth in the wholesale market, working alongside an already well-regarded partner.

“Tesco are obviously already a very well-established player in convenience retailing and people forget the fact they have a very good track record in supplying independents through One Stop, which has been a quiet success story,” TCC global insights director Bryan Roberts says.

“Some of the like-for-like numbers of independent retailers who have switched to One Stop has been beyond impressive.

“And the Londis shopkeepers I speak to have been blown away at how much better serviced they’ve been as part of Booker, than as part of Musgrave.

“The combination of Tesco and Booker’s buying power, along with potential private label implications, loyalty card implications and payment technology implications, will make One Stop and Londis a more attractive proposition than competing symbol groups.

“The likes of Costcutter and Spar will be watching this quite nervously,” says Roberts.

Eating out

Arguably the bigger fish Tesco is frying with this deal is what it calls the ‘out of home’ food category, which is growing exponentially.

The overall UK food market is worth £195bn in sales annually, £110bn of which is spent in grocery stores and online.

According to Tesco, the remaining £85bn is spent on food consumed ‘out of home’, at restaurants, fast food chains, coffee shops and pubs.

That market grew 2.5% between 2012 and 2015 and is expected to have ballooned by a further 3.8% by 2018.

Booker already has a robust presence in the supply of goods to operators within that sector, boasting the likes of Wagamama, Byron, Prezzo and Carluccio’s on an impressive list of restaurant customers.

For Roberts, that would have been an equally big attraction for Tesco, but he believes the supermarket giant won’t find it as easy selling its wares to restaurant chains.

“It’s certainly a growing part of the market and can offer quite attractive margins,” he flags.

“The only caveat for Tesco is that there is a big difference between the product you supply through cash and carry and the products you supply through supermarkets and convenience stores, in terms of things like brands and pack sizes.

“There is not necessarily a huge amount of buying synergy there, but it’s a growing market that it wants a piece of.”

“This is an extremely bold move and demonstrates an intent and sense of purpose that have been missing for the best part of a decade.”

John Ibbotson, Retail Vision

In addition, Tesco could potentially convert some of the excess space in its larger stores into cash and carries – or even extend the partnership with chains like Wagamama, Byron and Carluccio’s by incorporating restaurants or coffee shops into its hypermarkets.

All of which leaves Retail Vision’s John Ibbotson in no doubt that “the Tesco of old is back.”

“This is an extremely bold move and demonstrates an intent and sense of purpose that have been missing for the best part of a decade,” he declares.

“Tesco has shown its hand. Its competitors, in particular the discounters, now know they’re in a fight.”

Tesco may have landed the latest blow, but Tesco chief executive Dave Lewis and his new right-hand man, Booker boss Charles Wilson, know all too well that their fight is only just getting started.

Tesco aims to grab a share of the out of home food market through the merger.

Tesco merges with Booker

Tesco aims to grab a share of the out of home food market through the merger.