The end of January 2017 witnessed a major acquisition in the world of UK grocery retailing. Tesco, already holding around 28% of overall market share of the grocery sector acquired Booker: a large wholesaler, a supplier to thousands of convenience stores, symbol groups and a range of pubs, restaurants and fast food chains. The cost of this deal amounted to around £3.7 billion.

What are we to make of this acquisition? What is the rationale behind Tesco’s strategy and above all who will it benefit (apart obviously from Tesco)?

Let’s firstly try to put the Booker Group in perspective and context. As of early 2016 it recorded sales of over £5 billion. It’s operations are quite diverse and range from running a number of cash and carry (wholesale) businesses through to a number of well-known convenience brands such as Londis, Budgens and Premier. It’s “bread and butter” business is that of supplying private labels and branded goods to convenience stores, leisure outlets, restaurants and so on. This covers thousands of different lines. It also provides catering services to a wide range of restaurants, pubs and fast food chains. The restaurant chains include Wagamama, Premier, Prezzo and Carluccios.

A wide range of well-known convenience store brands operate under franchise agreements with Booker, buying in its goods and services.

These include more than 3,200 Premier branded stores, 47 discount stores operating under the Family Shopper brand, 1,500 Londis stores, and 120 Budgens shops.

By any standards of measurements this represents a major acquisition for Tesco and provides it with an entry into sectors where it is currently under-represented (small convenience stores) and where it has no prior presence (“out-of-home” food, catering and product services.

How does this deal stack up? At first glance it would appear to be heavily weighted in favour of Tesco. It is gaining access to new and growing sectors. It widens and deepens its presence in the convenience food sector and provides it with an opportunity to drive synergies and efficiencies in its supply chain management and structure, as a result of moving closer to suppliers (effectively becoming a wholesaler as well as a retailer.

This latter point is in my view a crucial one. Increasingly retailers are forced to drive lower prices and negotiate better deals from suppliers. This acquisition at first glance would appear to leave Tesco in a stronger position to (putting it politely) negotiate better prices from suppliers or (less politely) put the squeeze on suppliers more forcefully. In light of uncertainties due to pending Brexit decisions and happenings, this may be critical in the medium to longer term.

Some commentators put forward the view that in the longer term Tesco can generate savings of up to %600 million annually as a result of the efficiencies and synergies generated by the acquisition.

What has been the industry reaction to this acquisition?

One view is that it could be a “game-changer” in the food grocery sector in the UK. This mainly revolves around how Tesco can manage its supply chain more profitably and cost effectively. The wholesaler role brings it closer to the “mother lode” which is represented by the suppliers. In an increasingly uncertain environment any potential leverage in this area can leave Tesco in a more dominant position.

It also introduces Tesco more fully into the growing “out of home” food sector. It is estimated that the UK food market is worth around £195 million annually: of which £110 million is spend on grocery store and online food purchases. The remainder: £85 million is spend on food which is consumed “out of home”. This covers the phenomenon of eating out in restaurants, fast food chains, pubs and coffee shops. As we noted earlier, Booker owns well established in this sector such as Wagamama, Byron Burgers, Prezzo and Carluccios.

It is also argued that Tesco could use some of the excess space in its physical stores to convert to “cash and carry” selling space – thus reinforcing its move into the wholesale sector.

The acquisition also provides Tesco with the opportunity to develop its e-commerce business: for instance the acquisition of so many small convenience stores also opens up more flexible and adaptable policies with regard to “click and collect” options – an area which is growing rapidly in terms of shopper behaviour and preferences.

Interestingly it also would appear to indicate that Tesco is re-focusing its efforts on its domestic market: for many years now it has been preoccupied with international expansion and development. This move suggests that there is still further scope for driving increases in sales and profit in the UK.

The closer relationship with suppliers and the potential for increasing power and dominance in those relationships with respect to price in particular, arguably leaves Tesco in a stronger position to compete more aggressively with the pesky discounters such as Aldi and Lidl. For the past few years, the latter retailers have made inroads on the “Big Four” food retailers. This leaves Tesco potentially ahead of its main competitors such as Sainsbury’s. Asda and Morrison’s.

From a strategy perspective it highlights the potential importance of the concept of “first mover” advantage. Any initiative that generates a point of differentiation and creates a potential position of strength, it can be argued, is a positive move.

Synergies between Tesco and Booker can possibly be generated by the “marrying” of Tesco’s skills as an effective supply chain management operator allied to its management of technology in general and “big data” in particular”. It will acquire Booker’s skills and competencies in addressing sectors such as “”out of home” food and providing a range of services to the leisure and restaurant sectors.

Likewise Booker gains access to Tesco’s skills and resources. In theory it is a “win-win” for both parties.

Booker’s current presence with over 125,000 independent food stores and around 450,000 pubs, restaurants and coffee shops, when combined with the presence of Tesco’s operations is likely to attract the attention of the Competition authorities in the UK.

One such quango: the Grocery Code Adjudicator may be called upon to deliver a verdict on whether or not this acquisition is likely to create an unfair advantage and do damage to the small independent retailers. Crucially this body has no power to intervene with wholesalers. Which might provide a loophole for Tesco.

It is possible that Tesco and Booker may have to relinquish some of their outlets to comply with potential judgements by the competition authority. This remains to be seen.

In summary is this a good move for Tesco?

The general consensus would appear to be quite positive – albeit with some concerns being expressed over the extent to which it might create an unfair competitive advantage.

It explicitly recognises that shopper patterns and preferences are changing – convenience and “out of home” eating being two major drivers. Tesco has addressed these changes with its acquisition of Booker. This is reinforced by the estimate that the convenience sector is projected to grow by around £4.5 billion over the next four years. The growth in delivery requirements e.g. we can see this with the emergence of operators such as Deliveroo and Ubereats is addressed in Tesco’s acquisition.

Maybe it has captured the ultimate prize.

Let’s see what happens!