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It would be fair to say the Tesco/Booker deal came as a shock to even the most in-the-know industry watchers. Just last year, Tesco was busy shedding all of its ‘non-core’ businesses such as Nutricentre, Fresh & Easy and Giraffe to focus on the basics of being a supermarket again. And until today, Dave Lewis has kept his plans to acquire Britain’s biggest wholesaler well hidden. So is this effectively an admission that being a supermarket isn’t enough in today’s competitive environment?

It certainly is a tough market for the core grocery business. As Shoppercentric director Iona Carter points out, the heady days of comfortable margins and significant market share gains are firmly in the past. “Ultimately, grocery retailers are simply continuing to look for ways to reduce reliance on what has become a margin depleted core business – a fate largely brought about by themselves with the incessant price wars and promotional activity,” she says.

Indeed, Tesco has managed to make modest gains in profitability and market share in recent times – but this is coming from a particularly low point in its history. Once its recovery is complete, it is unlikely to squeeze much more growth out of an increasingly crowded market with tough competition from the discounters. If it wants to achieve figures that will really impress the City, it will have to look elsewhere.

This is undoubtedly part of the reason why Dave Lewis et al feel the need to diversify. Sainsbury’s boss Mike Coupe came in for a fair amount of stick when he announced the acquisition of Home Retail Group last year. But the incorporation of Argos into the business is where most of the growth came from over Christmas; like-for-like Argos sales grew 4% over the 15-week period, and Coupe revealed Argos concessions had generated a “halo effect” of a 1%-2% sales uplift on the food business in the integrated stores. Considering food registered a slight decline over the same period, it is easy to see why Coupe wants to expand beyond core grocery into becoming a multi-channel, diverse retailer.

As customers place an increasing emphasis on speed, there is also a compelling argument to tie up with companies that have a strong distribution network. Sainsbury’s said the Argos fast-track delivery time of four hours was a key motivation behind the deal, and Morrisons would have had similar thoughts over its arrangement with speed-freak Amazon. The Tesco merger will give it access to a huge distribution network that will help it meet evolving customer needs.

It’s an indication that doing the basics of grocery well – while undoubtedly important – just isn’t enough in today’s market. Parcel Hero’s head of consumer research David Jinks says standing still isn’t an option. “Tesco needs access to new markets to continue to thrive,” he argues. Retail Vision consultant John Ibbotson agrees: “It’s the only real way of achieving growth, isn’t it?”

As with all major deals, the Tesco/Booker tie-up will be sure to provoke questions on whether it will take up too much management time, and whether Lewis can afford to divert some attention away from his core business. But the real question is, can he afford not to?

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