Growth strategy - Tesco’s “Related-diversification” into Family Restaurants

Tesco's decision to acquire restaurant change has been described as "a very significant move". That's a nice piece of evaluation. So why has Tesco decided to diversify into the family restaurant market?

According to Tesco's press release:

Tesco today announced that it has acquired Giraffe, the award-winning restaurant group.

The acquisition forms part of Tesco’s strategy to develop the space in some of its larger stores and create even more compelling retail destinations where customers can meet, eat and drink, as well as shop. The first Giraffe restaurant to open next to a Tesco store will be near London.

Giraffe is a leading family-friendly restaurant that offers a wide range of fresh, seasonal, quality food, comfortable interiors and friendly staff. Its menu covers a range of global dishes and appetising options for breakfast, lunch and dinner.

I think there are two key drivers behind the decision/

The first is how to make better use of the enormous retail space that Tesco has developed in the UK (and internationally) in recent years. Tesco Extra stores in particular are simply huge, but I'm not sure you'd describe them as leisure destinations. By offering a broader range of products & services within the existing retail space, Tesco is looking to create leisure destinations rather than simply shopping spaces. What other leisure activities might be incorporated into the space?

The second issue is the sluggish nature of growth in the business. Tesco's organic growth story over the last two decades has been built around a rapid expansion in their number of locations. Inevitably the opportunities to continue opening new stores has weakened. So takeovers of attractive businesses in different, but related markets might help build momentum in the Tesco sales and profit growth record again.

Key details of Tesco's takeover of Giraffe:

Price paid: £48.6m

Percentage share bought by Tesco: 100%

Founded: 1998 by Russel and Juliette Joffe

Number of locations: 48 in the UK (including airports) & one in Dubai

Ownership: Russel & Juliette Joffe & venture capitalists Risk Capital Partners & 3i