The retailer, which is the biggest in the UK, is reportedly planning a separate chain of stores which would take the fight to its fast-expanding German rivals.
Industry sources told The Sunday Times that the supermarket would establish a brand with a smaller range of products, mimicking the restricted ranges of Aldi and Lidl which allow the retailers to offer low prices.
Earlier this month, Tesco told shareholders that new innovative formats would be part of its future planning following its £3.7bn takeover of Booker Group.
The group said: "By joining forces, the combined group will have enhanced capabilities and will benefit from the learnings and experience of both businesses as it seeks to develop new formats to better serve customers."
Tesco also announced that Booker chief executive Charles Wilson will become boss of UK operations once the two companies have merged.
The proposed move comes at a time of change for the group. In addition to the Booker merger, Tesco has announced it is cutting 800 jobs.