Tesco’s £3.7bn proposed merger with Booker, the UK’s largest food wholesaler, represents a change of commercial strategy for the supermarket giant.
Following the firm’s decision to retract from some parts of their international operations, including the South Korean and Turkish arms of the business, this merger is another indication that Tesco is more comfortable operating from within the UK with a more vertical growth strategy.
Additional volume will allow Tesco to further consolidate its strong market position and will provide scale for leverage, allowing them to place further pressure on suppliers and secure more favourable deals.
It is highly likely that this deal will attract the attention of the competition authorities, as it would afford Tesco more power over its suppliers and provide the company with greater control over levels of market competition.
Tesco has argued that the deal does not raise issues in terms of competition, as it does not involve the acquisition of stores.
However, with many independent stores to be supplied through the merged Booker and Tesco business, retailers are likely to feel uncomfortable about working with what has historically been one of their biggest competitors.
Following the scandal resulting from the firm’s huge profits overstatement in 2014, Tesco’s decision to combine the retail and wholesale capabilities will no doubt be followed closely, with supermarkets increasingly being forced to develop new strategies to increase market share and win customers back from major discount chains.